Understanding the Impact of Conversion on Profitability in Islamic Banks

Abstract

Conversion can be an alternative strategy for small Islamic banks compared to spin-offs. There are two conventional banks in Indonesia that have fully converted into Islamic banks, namely Bank of Aceh Sharia and Bank of NTB Sharia. The conversion strategy will improve the performance of Islamic banks. This study examines the impact of the conversion on the level of profitability of the converted bank. By using panel regression analysis, this study shows that the conversion decision has no impact on Islamic banks' profitability level. This study found that the variable that influences the level of profitability is the default rate which is proxied by the NPF. This condition happened because the bank was still focused on the internal consolidation process in the early years of conversion. This result implies that the conversion strategy must be carried out with various considerations and requires support from all stakeholders.