The Islamic banking spin-off : lessons from Indonesian Islamic banking experiences

Abstract EN

The Indonesian Islamic Banking Act of 2008 requires conventional banks to spin-off their Sharīah business units if they fulfill the spin-off criteria, which is achieving 50 % of the parent’s assets or 15 years after this Act was established.

This will allow some Sharīah business units to transform into fully-fledged Islamic banks.

Some Sharīah business units have already undertaken the spin-off process although they did not fulfill the spin-off criteria.

The purpose of this paper is to analyze these spin-off banks and compare their performance before and after the spin-off, while also examining the type of spin-off and its effect on the bank’s performance.

This study uses difference in difference analysis to conduct this analysis.

Assets, financing, and deposit funds are used as performance measures.

The findings show that the spin-off policy should be re-evaluated for various reasons.

Most important among them is that it is highly unlikely that Islamic banks in Indonesia can achieve 50% of the parent bank’s assets.

The results also show that the spin-off did not have any significant impact upon assets and deposit funds, although total financing was found to be significantly improved.

Lastly, the results show that the spin-off type did not have an impact on the bank’s performance.