Title: Do business models in Islamic bank matters? The effect of business models on bank performance and stability

Authors: Fakhrana Nadhilah; Oktofa Yudha Sudrajad

Addresses: Bandung Institute of Technology, Bandung, 40132, Indonesia ' Bandung Institute of Technology, Bandung, 40132, Indonesia

Abstract: This paper examines the effect of business models in Islamic banking on bank performance and stability. We use a method to cluster dynamically, namely longitudinal k-means, to identify the business model of Islamic banks from a sample of 31 Islamic banks in Indonesia from 2010Q1 to 2019Q3. We use return on asset (ROA) and return on equity (ROE) to measure bank performance and z-index and loss provisions to measure bank stability. Our findings show that profit-sharing banks and margin banks have the potential to increase ROA and tend to be more stable. Meanwhile, customer banks are better able to maintain ROE but less stable. We also confirm the literature that fee-based products increase a bank's profitability while funding mudharabah products decreases a bank's performance and stability.

Keywords: Islamic banking; business model; dynamic clustering; bank performance; bank stability.

DOI: 10.1504/IJMEF.2022.126901

International Journal of Monetary Economics and Finance, 2022 Vol.15 No.3, pp.253 - 272

Received: 05 Feb 2021
Accepted: 08 Feb 2022
Published online: 11 Nov 2022 *

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