Do Islamic banks bear displaced commercial risk? Evidence from Indonesia

Abstract

The market share of Islamic commercial banks in Indonesia is small despite the fact that Indonesia is a predominantly Muslim country. This paper investigates the asymmetric effect of the deposit rate of conventional banks on Islamic bank deposits in Indonesia applying a dual banking system. This study employs the Non-linear ARDL (NARDL), using monthly data and covering 2009:M1–2019:M7. The findings clearly confirm the long-run relationship between the Islamic deposit and conventional deposit rate for any maturity. Furthermore, the impact of conventional bank deposit rate is asymmetry on Islamic bank deposit for any maturity, implying that Islamic bank deposits react differently to up and down in conventional bank deposit rates, but it tends to weaken for longer maturity. More interestingly, based on asymmetric results, Islamic bank deposits adjust at a higher speed to an increase in conventional deposit rates compared to a rise in the Islamic deposit rates. The results imply that Islamic bank depositors may transfer their funds to conventional bank deposits as conventional bank deposit rates rise in a dual banking environment known as displaced commercial risk (DCR).