Islamic Banks vs Conventional Banks in Indonesia: An Analysis on Financial Performances

Islamic banks in Indonesia have existed for twenty years. Many developments have occurred in this largest Islamic country. Policy makers, academic experts and industry practitioners have provided unified support to ensure increased achievement in Islamic banking. Therefore, now is the time to assess the differences in performance between Islamic banking and conventional banking. This article aims to explain, assess and critically compare the differences in the financial performance of Islamic banks and conventional banks. Data relating to capital adequacy ratio (CAR), return on assets (ROA), operating costs/income (BOPO), unpaid loans/unpaid financing (NPL), and loan deposit ratio/financing deposit ratio for Islamic banks and conventional banks have been studied. . The study analysis involved monthly data covering the period January 2004 to July 2014 (127 observations). The t test is used to see whether there is a significant difference in the ratio between the two banks. This study found that CAR, ROA, BOPO and NPL of conventional banks were significantly higher than Islamic banks, but not FDR. Based on the study's decision on capital adequacy, Islamic banks require more capital to face risks like conventional banks. Conventional banks also need to act as financial intermediaries to support other sectors such as Islamic banks.

Keywords: Islamic Bank; conventional banks; financial performance