Febrian, Erie; Mydin Meera, Ahamed Kameel
January 2011
Journal of International Finance & Economics;2011, Vol. 11 Issue 1, p30
Academic Journal
Local banks in Indonesia have less access to the domestic market than do national banks, and therefore are less capable for performing well in a downturn economy, despite the full support from the respective State Government. Meanwhile, Islamic bank's strong reliance on the performance of its Profit-Loss Sharing (PLS) partners may pose serious liquidity threat in a recession, since the bank also directly bears its partners' failure risk. Those circumstances may discourage public to deposit their fund in local banks and Islamic banks when a crisis hit the economy. Nevertheless, such disadvantages may not be significant to the public if the government either partially or fully guarantees any bank deposit at certain level. In other words, public can be indifferent to risk of local banks, and Islamic banks in the existence of deposit insurance. This study carries out empirical investigation on whether depositors in Indonesia are insensitive to the risk of Islamic banks and local banks before the US crisis hit the economy (2005.9 - 2008.8) and during the crisis (2008.9 - 2010.12), which is under the explicit deposit insurance regime. The findings show that depositors seem to be indifferent to risk of Islamic and local banks when deposits are guaranteed, regardless the ceiling levels and the economy states, to the extent that risk is calculated using several internal and external factors of a bank.


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