The impact of funding risk on the stability of Islamic rural banks in Indonesia

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Abstract
This paper investigates the effect of funding risk, along with some control variables, including bank-specific and macroeconomic variables, on the stability of Islamic rural banks (IRBs) in Indonesia. Dynamic panel regression is applied. A two-step GMM is employed to quarterly data from 83 IRBs on Java Island from 2017 to 2021, utilizing unbalanced panel data. In addition, our study was split between large and small IRBs. The results suggest that funding risk positively affects stability, but it is more pronounced for small IRBs than for large IRBs. Banks with strong fundamentals, such as high assets, CAR, and efficiency, encourage bank stability, but high non-performing financings lower bank stability. Economic upturns also enhance bank stability. Policy implications include strengthening depositor confidence through product innovation and raising capital adequacy to enhance stability. First, IRBs should raise capital and mobilize public funds to strengthen stability. Second, IRBs should increase cost efficiency and manage their financing risk well to boost stability.

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