Early Warning Systems in Indonesian Islamic Banks: A Comparison of Islamic Commercial and Rural Banks Imron Mawardi1*, Wahyu Wibisono Wahid2, Tika Widiastuti3, Muhammad Ubaidillah Al Mustofa4
1,2,3 Department of Islamic Economics, Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia
4 Department of Development Studies, Faculty of Creative Design and Digital Business, Institut Teknologi Sepuluh Nopember, Surabaya, Indonesia
Abstract
The study examines and compares the stability of Islamic commercial banks (ICB) and Islamic rural banks (IRB) in Indonesia using a Markov Switching model of the Z score. This investigation makes use of monthly data from January 2014 to April 2022. According to the findings, ICBs are more vulnerable to crises and require a longer period of recovery than Islamic rural banks. The findings demonstrated that IRBs are more resistant to external and internal shocks than ICB. Furthermore, it has been discovered that Islamic commercial banks are more vulnerable to crisis risk, with less flexibility to quickly adapt during crises. The findings of this study could be used to develop policy for the relevant stakeholders.
Keywords: Early Warning System, Markov Switching, Islamic Banking, Bank Vulnerability, Z-score
