• Mohsin Ali Taylor's university
  • Mudeer Ahmed Khattak Universiti Kuala Lumpur
Keywords: Profitability, Risk, Non-intermediation income, Indonesia


Banks have tried to compensate for the decline in their profits due to increasedcompetition by shifting their focus toward non-intermediation activities. This paperassesses the impact of these non-intermediation activities on the profitability and riskof Islamic and conventional banks in Indonesia. We use a system generalized methodof moments estimator to control for the simultaneity for all the banks in our samplefor the period from 2007 to 2017. Our results suggest that non-intermediation incomehas a positive impact on bank performance. We find no difference between Islamicand conventional banks in terms of the link between non-intermediation income andperformance.


Download data is not yet available.


Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic Banking. Review of
Finance, 17, 2035-2096.
Abedifar, P., Molyneux, P., & Tarazi, A. (2018). Non-Interest Income and Bank
Lending. Journal of Banking and Finance, 87, 411–426.
Allen, F. & Santomero, A.M. (2001). What Do Financial Intermediaries Do? Journal
of Banking and Finance, 25, 271-294.
Ammar, N., & Boughrara, A. (2019). What Drives the Banks’ Diversification
Decision? A Dynamic Nonlinear Panel Data Approach. Managerial and Decision
Economics, 40, 907-922.
Arellano, M., & Bover, O. (1995). Another Look at The Instrumental Variable’s
Estimation of Error-Component Models. Journal of Econometrics, 68, 29–51.
Ashraf, M. M., & Rehman, Z. (2011). The Performance Analysis of Islamic and
Conventional Banks: The Pakistan’s Perspective. Journal of Money, Investment
and Banking, 22, 99-113.
Azmi, W., Ali, M., Arshad, S., & Rizvi, S. A. R. (2019). Intricacies of competition,
stability, and diversification: Evidence from dual banking economies.
Economic Modelling, 83, 111-126.
Baele, L., De Jonghe, O., Vander Vennet, R., (2007). Does The Stock Market Value
Bank Diversification? Journal of Banking and Finance, 31, 1999–2023.
Bashir, A. M. (2000). Determinants of Profitability and Rate of Return Margins in
Islamic Banks: Some Evidence from The Middle East. ERF’s Seventh Annual
Beccalli, E., Anolli, M., & Borello, G. (2015). Are European Banks Too Big? Evidence
on Economies of Scale. Journal of Banking and Finance, 58, 232-246.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional
banking: Business model, efficiency and stability. Journal of banking and finance,
37, 433- 447.
Bertocco, G., (2008). Finance and Development: Is Schumpeter’s Analysis Still
Relevant? Journal of Banking and Finance, 32, 1161–1175.
Blundell, R., & Bond, S. (1998). GMM Estimation with Persistent Panel Data: An
Application to Production Functions, Working Paper, IFS No. W99/04.
Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income Diversification and Bank
Performance: Evidence from Italian Banks. Journal of Financial Services Research,
33, 181–203.
Chong, B. S., & Liu, M. H. (2009). Islamic Banking: Interest-Free or Interest-Based?
Pacific-Basin Finance Journal, 17, 125-144.
Chortareas, G. E., Girardone, C., & Ventouri, A. (2012). Bank Supervision,
Regulation, and Efficiency: Evidence from The European Union. Journal of
Financial Stability, 8, 292-302.
Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical
Analysis. Journal of Financial Services Research, 38, 95-113.
Cornett, M.M., Ors E., & Tehranian, H. (2002). Bank Performance Around the
Introduction of a Section 20 Subsidiary. Journal of Finance, 57, 501-521.
De Jonghe, O. (2010). Back to the Basics in Banking? A Micro-Analysis of Banking
System Stability. Journal of Financial Intermediation, 19, 387-417.
Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The Determinants of Capital
Structure: Evidence from The Asia Pacific Region. Journal of Multinational
Management, 14, 387–405.
Demirgüc-Kunt, A., & Huizinga, H., (2010). Bank Activity and Funding Strategies:
The Impact on Risk and Returns. Journal of Financial Economics, 98, 626–650.
Demirgüç-Kunt, A., and Detragiache, E. (2011). Basel core principles and bank
soundness: Does compliance matter? Journal of Financial Stability, 7, 179-190.
Demsetz, R.S., & Strahan, P.E., (1997). Diversification, Size, And Risk at Bank
Holding Companies. Journal of Money, Credit and Banking, 29, 300–313.
DeYoung, R., & Rice, T. (2003). Non-Interest Income and Financial Performance at
US Commercial Banks, Federal Reserve Bank of Chicago, August 2003, S&R-
DeYoung, R., & Rice, T. (2004). Noninterest Income and Financial Performance at
US Commercial Banks. Financial Review, 39, 101-127.
DeYoung, R., & Roland, K. P. (2001). Product Mix and Earnings Volatility at
Commercial Banks: Evidence from A Degree of Total Leverage Model. Journal
of Financial Intermediation, 10, 54–84.
Edirisuriya P., Gunasekarage, A., & Perera S. (2019) Product Diversification and
Bank Risk: Evidence from South Asian Banking Institutions, Applied Economics,
51, 444-464
Geyfman, V., & Yeager ,T.J. (2009). On the Riskiness of Universal Banking: Evidence
from Banks in the Investment Banking Business Pre- and Post-GLBA. Journal of
Money, Credit and Banking, 41, 1649-1669.
Fauver, L., Houston, J., & Naranjo, A. (2003). Capital market development,
international integration, legal systems, and the value of corporate
diversification: A cross-country analysis. Journal of Financial and Quantitative
Analysis, 38, 135-158.
Haron, S., & Azmi, W. N. (2004). Profitability Determinants of Islamic Banks.
Islamic Banking Conference, Union Arab Bank, Beirut, Lebanon.
Hassan, M. K., & Bashir, A. M. (2003). Determinants of Islamic Banking Profitability.
In 10th ERF annual conference, Morocco, 7, 2-31.
Hirtle, B. J., & Stiroh, K. J. (2007). The return to retail and the performance of US
banks. Journal of Banking & Finance, 31, 1101-1133.
Ito, H. (2006). Financial Development and Financial Liberalization in Asia:
Thresholds, Institutions and The Sequence of Liberalization. North American
Journal of Economics and Finance, 17, 303–327.
Jalil, A., Feridun, M., & Ma, Y., (2010). Finance-Growth Nexus in China Revisited:
New Evidence from Principal Components and ARDL Bounds Tests.
International Review of Economics and Finance, 19, 189–195.
Karakaya, A., & Er, B. (2013). Noninterest (Nonprofit) Income and Financial
Performance at Turkish Commercial and Participation Banks. International
Business Research, 6, 106.
Karim, B. K., Sami, B. A., & Hichem, B. K. (2010). Bank-Specific, Industry-Specific
and Macroeconomic Determinants of African Islamic Banks’ Profitability.
International Journal of Business and Management Science, 3, 39-56.
Khan, F. (2010). How ‘Islamic’is Islamic Banking? Journal of Economic Behavior &
Organization, 76, 805-820.
Kwan S.H. (1998). Securities Activities by Commercial Banking Firms’ Section 20
Subsidiaries: Risk, Return and Diversification Benefits. Federal Reserve Bank
of San Francisco, working paper 98-10.
Laeven, L., & Levine, R. (2007). Is There a Diversification Discount in Financial
Conglomerates? Journal of Financial Economics, 85,331–367.
Law, Siong Hook., & Azman-Saini, W.N.W., & Ibrahim, Mansor H. (2013).
Institutional Quality Thresholds and The Finance – Growth Nexus. Journal of
Banking and Finance, Elsevier, 37, 5373-5381.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank Income Structure and Risk—
An Empirical Analysis of European Banks. Journal of Banking and Finance, 32,
Lin S.L., Wu S., Penm J.H.W. and Terrell R.D. (2005). The Relationship and
Causality Testing between Diversification, Risk and Financial Performance:
Empirical Examination in Taiwan’s Banking Industry. International Journal of
Services Technology and Management, 6, 556-575.
Masruki, R., Ibrahim, N., Osman, E., & Abdul Wahab, H. (2010). Financial
Performance of Malaysian Islamic Banks Versus Conventional Banks. Journal
of Business and Policy Research, 6, 67-79.
Molyneux, P., & Yip, J. (2013). Income Diversification and Performance of Islamic
Banks. Journal of Financial Management, Markets and Institutions, 1, 47-66.
Moshirian, F., & Van der Laan, A. (1998). Trade in Financial Services and The
Determinants of Banks’ Foreign Assets. Journal of Multinational Financial
Management, 8, 23-38.
Moyo, J., Nandwa, B., Odour, J. (2014) Financial Sector Reforms, Competition and
Banking System Stability in Sub-Saharan Africa. Paper presented at the IMF/
DFID Conference.
Noman, A. H. M., Gee, C. S., & Isa, C. R. (2018). Does Bank Regulation Matter On
the Relationship Between Competition and Financial Stability? Evidence from
Southeast Asian Countries. Pacific-Basin Finance Journal, 48, 144-161.
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income
Diversification and Risk: Does Ownership Matter? An Empirical Examination
of Indian Banks. Journal of Banking and Finance, 36, 2203-2215.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of Banks’ Profitability:
Evidence from EU 27 Banking Systems. Procedia Economics and Finance, 20, 518-
Poghosyan, T. (2013). Financial Intermediation Costs in Low Income Countries:
The Role of Regulatory, Institutional, and Macroeconomic Factors. Economic
Systems, 37, 92-110.
Rahaman, M.M., (2011), Access to Financing and Firm Growth. Journal of Banking
and Finance, 35, 709–723.
Rajan, R. G. & Zingales, L. (1998). Financial Dependence and Growth. American
Economic Review, 8, 559-586.
Ramasastri A.S., Samuel A., & Gangadaran S. (2004). Income Stability of Scheduled
Commer- cial Banks: Interest Vis-à-Vis Non-Interest Income. Economic and
Political Weekly, 39, 1311-1316.
Rogers, K., & Sinkey, J. F. (1999). An Analysis of Nontraditional Activities at US
Commercial Banks. Review of Financial Economics, 8, 25-39.
Sadique, M. A. (2010). Islamic Bank’s Dilemma between Ideals and Practice: Debt
or Equity. Global Journal of Management and Business Research, 10.
Sanya S. and Wolfe S. (2011) ‘Can Banks in Emerging Economies Benefit from
Revenue Diversification?’, Journal of Financial Services Research, 40, 79-101.
Shahimi, S., Ismail, A. G. B., & Ahmad, S. B. (2006). A Panel Data Analysis of Fee
Income Activities In Islamic Banks. Journal of King Abdulaziz University: Islamic
Economics, 19, 22-36.
Smaoui, H., & Salah, I. B. (2011). Profitability of Islamic Banks in The GCC Region.
Annual Paris Conference on Money, Economy and Management, Paris, France.
Smith R., Staikouras C. and Wood G. (2003) Non-Interest Income and Total Income
Stability, Bank of England Working Paper no. 198.
Soedarmono, W., Machrouh, F., & Tarazi, A. (2013). Bank Competition, Crisis and
Risk Taking: Evidence from Emerging Markets in Asia. Journal of International
Financial Markets, Institutions and Money. 23, 196-221.
Stiroh, K. J., & Rumble, A. (2006). The Dark Side of Diversification: The Case of US
Financial Holding Companies. Journal of Banking and Finance, 30, 2131-2161.
Stiroh, K.J., (2004). Diversification in Banking: Is Noninterest Income the Answer?
Journal of Money, Credit and Banking, 36, 853–882.
Zhang, Y., (2010). Analysis of the Systematic Risk of Financial Institution in Modern
Finance Evolution, International Journal of Economics and Finance, 2, 234––237
Zahavi, T., & Lavie, D. (2013). Intra‐industry diversification and firm performance.
Strategic Management Journal, 34, 978-998.
How to Cite