Influence of spin-off decision on financing risk: Empirical insight from Indonesian Islamic banks

Abstract

Background: Spin-offs play a significant role in organizational development strategies, particularly in Islamic banking, by fostering entrepreneurship, innovation, and Shariah-compliant management practices. Indonesia stands as a pioneer in implementing the dual banking system and has established a spin-off policy to foster the growth of Islamic banking. This study investigates whether the spin-off decision has a significant impact on financing risk in Indonesian Islamic banks. Methods: Financing risk is measured by the non-performing financing ratio, while the spin-off decision is represented by a dummy variable equal to 1 for the post-spin-off period and 0 for the pre-spin-off period. This study utilizes data from semi-annual reports of 35 Indonesian Islamic banks and analyzes it using a dynamic panel model with the Generalized Method of Moments (GMM) to overcome potential endogeneity issues that might bias the results. Results: The findings reveal that spin-offs significantly reduce financing risk, thereby enhancing the financial resilience and boosting investor appeal. Notably, this implies that Islamic banks operating as Islamic windows exhibit a higher level of financing risk compared to fully-fledged Islamic banks. Furthermore, a noteworthy pattern emerges that spin-off Islamic banks with substantial assets demonstrate greater risk in comparison to their counterparts with more modest assets. System GMM also confirmed the result. Conclusions: Islamic banks can significantly reduce their financing risks by establishing independent Islamic banks, or spin-offs. Unlike Islamic windows, which are typically integrated within conventional banks and face higher risk levels, standalone Islamic banks offer greater flexibility and control over their operations. Therefore, spin-off policies for Islamic banks appear to be a viable strategy, as independence fosters enhanced risk sensitivity.