“The impact of fintech peer-to-peer lending and Islamic banks on bank performance during COVID-19”

This study delves into the influence of Peer-to-Peer (P2P) Fintech lending on bank performance in Indonesia, with a specific focus on its effects on Islamic banks both before and during the COVID-19 pandemic. Employing a fixed-effects model, unbalanced panel data from 121 banks, including 16 Islamic banks, were analyzed. The findings unveil a significant and positive impact of growth loan disbursement to bor-rowers from P2P lending on bank performance, particularly in terms of return on assets. Additionally, Islamic Banks exhibit a significant and favorable effect on overall bank performance. Conversely, the joint interaction between P2P lending and Islamic Banks demonstrates a negative and significant influence on Islamic bank performance, suggesting that while P2P lending may benefit conventional banks, it adversely affects Islamic banks. Furthermore, this negative impact is exacerbated during the COVID-19 period. These outcomes underscore the importance of collaboration or strategic alliances between P2P lending platforms and Islamic banks, particularly in the context of the COVID-19 pandemic.


INTRODUCTION
The COVID-19 pandemic has undeniably exerted substantial pressure on the global economy, leaving a lasting impact on various aspects of financial systems worldwide.This effect transcended industry boundaries, affecting financial institutions, including banks, at their core, as highlighted in the April 2020 edition of The World Economic Outlook by the International Monetary Fund (IMF).The IMF projected a significant global economic downturn, anticipating a contraction of approximately 3% in the global economy, with emerging markets expected to contract by 1%.This global economic upheaval naturally reverberated within national borders, impacting Indonesia in no small measure.This economic turbulence significantly impacted the Indonesian banking sector, notably reflected in the decline in the average net profit of banks in 2020.Even the country's four major banks, pillars of the domestic financial landscape, experienced substantial declines in net profits, ranging from 5% to a staggering 78.7% compared to the same period in 2019.This financial setback had far-reaching implications for Indonesia's financial sector, prompting an exploration into the elements that contributed to the resilience or vulnerability of the banking sector during these tumultuous times.Amid this economic upheaval, a remarkable development was the substantial increase in cumulative financing disbursement by Fintech lending platforms, as indicated by information obtained in April 2020 from the Financial Services Authority Indonesia.The numbers tell a compelling story, revealing an impressive 186.54% year-on-year growth, culminating in a total disbursement of IDR 106.06 trillion.These Fintech lending platforms also witnessed significant growth in both lenders, totaling 647,993 accounts, and borrowers, numbering 24,770,305 accounts.
The relevance of examining the impact of Peer-to-Peer (P2P) Fintech lending on bank performance, particularly within the context of health crises such as the COVID-19 pandemic, cannot be overstated.P2P lending has emerged as a disruptive force in the financial sector, reshaping traditional banking practices and challenging established business models.This phenomenon holds paramount importance because it significantly influences bank profitability, risk management, and efficiency, shaping their strategies for survival and growth during challenging times.The ongoing COVID-19 crisis underscores the urgency of understanding how banks, particularly Islamic banks, navigate this dynamic landscape.The pandemic has spurred increased demand for digital financial services, underscoring the importance of banks, including Islamic banks, adapting quickly and effectively to evolving customer preferences and market dynamics.The resulting economic uncertainties, financial disruptions, and shifts in consumer behavior necessitate a thorough examination of how Islamic banks, grounded in distinct ethical principles, engage with P2P lending to sustain their performance and fulfill their socio-economic responsibilities during health crises.
Islamic banks, guided by Sharia principles that prohibit interest-based transactions and promote ethical and equitable financial practices, present a unique context in the realm of P2P lending.The convergence of innovative Fintech solutions with Islamic finance principles offers a promising avenue for financial inclusion and sustainable banking practices.However, this convergence raises complex questions about the compatibility of P2P lending with the ethical underpinnings of Islamic finance.Consequently, the study of the interaction between P2P lending and Islamic banks becomes even more significant in light of the COVID-19 pandemic.

LITERATURE REVIEW AND HYPOTHESES
The theoretical frameworks proposed by Thakor (2012), Christensen (1997) The impact of FinTech on the financial landscape is a multifaceted phenomenon, with implications for various aspects of banking and economic performance.Tang (2019) reveals that peer-to-peer lending tends to have a substitutional rather than complementary effect on traditional banking services.This trend is particularly pronounced among small nonurban commercial banks, which experience a loss in loan volume, pushing them towards riskier lending practices in response to the growing prevalence of peer-to-peer lending (Cornaggia et al., 2018).
The competitive pressure exerted by FinTech companies emerges as a significant driver of change within the banking sector, as highlighted by Jakšič  (2016) shows that collaboration between Fintech and Banks can increase customer confidence and provide a complementary effect.According to Li et al. (2017), there is a favorable correlation between the rise in transactions in FinTech companies and the stock returns of US-based incumbent retail banks.This finding suggests that increased investment has a comparable effect on both sectors.For small banks, strategic partnerships between FinTech firms and banks result in win-win transactions.In the meantime, the presence of FinTech startups merely replaces unstable, highly concentrated traditional banks (Hodula, 2021).For small banks, strategic alliances between Fintech and banks can generate profits.Therefore, Fintech can serve as a supplement to banks rather than as a replacement for them.
The research results highlight that Islamic banks exhibit relative strengths in efficiency, profitability, risk management, and liquidity compared to conventional banks.Islamic banks have relative advantages in terms of efficiency, profitability, liquidity, and risk management, whereas conventional banks outperform them in terms of asset quality (Khan et al, 2017).According to the findings of Ledhem and Mekidiche (Ledhem & Mekidiche, 2020), Islamic banks often exhibit higher levels of capitalization, reduced risk profiles, and enhanced liquidity compared to their conventional counterparts.In addition, Majeed and Zainab (2021) discovered that state ownership significantly improves the performance of conventional banks in the GCC region, but not Islamic banks.Olson and Zoubi (2017).This divergence in profitability dynamics during crises emphasizes the need for Islamic banks to adapt swiftly to evolving market conditions.In comparison to conventional banks, Islamic banks have poor performance (Yudaruddin, 2023b).
Overall, the main objective of this study is to investigate the impact of peer-to-peer (P2P) financial technology lending on bank performance.In addition, this study investigates the influence of peerto-peer (P2P) Fintech lending on the performance of Islamic banks before and during COVID-19.
There are actually two goals here.The present study aims to test the following hypotheses: H1: Fintech has a negative impact on bank performance.
H2: Islamic banks have a positive impact on bank performance.
H3: Fintech has a negative impact on Islamic bank performance.
H4: Fintech has a negative impact on Islamic bank performance during COVID-19.The proportion of total commercial banking assets held by the three main commercial banks -/+ banks dominating the market, can have both positive and negative effects on bank performance.On the one hand, concentration can increase the stability of the banking sector, as large banks may be better able to cope with large economic pressures.

Methodology
In terms of the econometric methodology, the analysis is conducted in three stages.First, regressions are performed where Peer-to-Peer (P2P) Fintech lending is measured using variables such as Islamic Banks, Growth Loan Disbursement to Borrowers, and a set of control variables simultaneously, as shown in Equations ( 1) and ( 2).In the second stage, the study expands upon this regression by introducing new variables derived from the interaction between P2P Fintech lending and Islamic banks (Equations ( 3) and ( 4)).This process is repeated across all three stages, with the sample being divided between the periods before and during the COVID-19 pandemic.The following model was employed to predict bank performance:     Table 3, the correlation matrix, provides insight into the relationships between the variables under examination.Notably, the correlation coefficients appear to be generally low across the board, suggesting that there is no significant cause for concern regarding multicollinearity.For instance, when considering the correlation between Peerto-Peer (P2P) lending and Islamic Banks (IB), it is nearly zero at -0.0047.Similarly, the correlation between Efficiency (EFF) and Concentration Ratio (CR3) is also quite low at -0.0132.These low correlation coefficients indicate that the examined variables are not strongly linearly related, reducing the risk of multicollinearity.Overall, this correlation matrix provides confidence that multicollinearity is not a substantial issue in this study, which enhances the robustness of the subsequent regression analyses.In the first analysis stage, the effects of P2P lending were assessed, Islamic Banks (IB), and several control variables on bank performance were measured using ROA and ROE.The regression analysis in Table 4 reveals a significant and positive influence of growth loan disbursement to borrowers from P2P lending on bank performance, particularly on return on assets (ROA), as indicated by the coefficient value of 0.0957 with a probability of 0.000.Therefore, these results do not support the first hypothesis (H1).Conversely, the Islamic Bank (IB) variable shows a positive and significant effect, with a coefficient of 1.0285 and 4.0020, suggesting that Islamic banks exhibit superior performance compared to conventional banks.This supports hypothesis 2 (H2).Control variables exhibit expected relationships, with coefficients aligning with the theoretical framework, although some variables are not statistically significant.

EMPIRICAL RESULTS
Table 5 shows the impact of independent and control variables on the dependent variables during COVID-19.The results reveal that the impact of growth loan disbursement to borrowers from P2P lending on bank performance is not significant, both before the COVID-19 pandemic (2016-2019) and during the pandemic (2020-2022).In contrast, the impact of Islamic Banks on bank performance tends to be more positive and significant before the COVID-19 period compared to during the pandemic.The results reveal that the interaction between Peer-to-Peer Fintech lending and Islamic Banks is only significant during the COVID-19 period.
This indicates that the negative impact experienced by Islamic banks due to increased growth loan disbursement to borrowers from P2P lending reduces their performance, especially during COVID-19, supporting hypothesis 4 (H4).

DISCUSSION
This study examines the impact of Peer-to-Peer (P2P) Fintech lending on Indonesian bank performance.In addition, it investigates the effects of P2P Fintech lending on Islamic bank performance in Indonesia before and during the COVID-19 period.
The positive and significant impact of growth loan disbursement to borrowers from P2P lending on bank performance, particularly return on assets (ROA), suggests that the adoption of P2P lending practices complements Islamic banks rather than disrupts them.Indeed, several banks in Indonesia have adopted collaboration strategies with P2P lending fintech to enhance their performance.This result aligns with prior research indicating the benefits of collaboration or strategic alliances between P2P lending and banks in boosting bank performance (Juengerkes,  The negative and significant impact of the joint interaction between P2P lending and Islamic Banks on Islamic bank performance suggests that while P2P lending may positively affect conventional banks, it has an adverse effect on Islamic banks.This implies that P2P lending practices may not be as suitable for the unique operational context of Islamic banks, possibly due to differences in risk management strategies or customer preferences.Furthermore, the significant interaction between

CONCLUSION
This study investigates the impact of Peer-to-Peer (P2P) Fintech lending on bank performance in Indonesia, focusing on Islamic banks both before and during the COVID-19 pandemic.Unbalanced panel data from 121 banks, including 16 Islamic banks, were analyzed using a fixed-effects model.The findings reveal a significant and positive effect of the growth distribution of funds to individuals who have borrowed money from peer-to-peer lending on bank performance, especially return on assets.In addition, Islamic banks have a significant and positive impact on the overall performance of banks.In contrast, the interaction between peer-to-peer lending and Islamic banks has a negative and significant effect on Islamic bank performance, suggesting that while peer-to-peer lending may benefit conventional banks, it is detrimental to Islamic banks.In addition, this negative impact is exacerbated during the period of COVID-19.In the context of the COVID-19 pandemic, these results highlight the significance of collaboration or strategic alliances between P2P lending platforms and Islamic banks.
The results of this study hold important policy implications for regulators and banks, especially Islamic banks, in Indonesia.Regulators should consider the need for comprehensive oversight and guidance regarding the collaboration between P2P lending platforms and banks, especially Islamic banks, to ensure responsible lending practices and risk management.Additionally, given the adverse impact of the interaction between P2P lending and Islamic Banks, especially during COVID-19, regulators should encourage Islamic banks to diversify their income sources and enhance their risk mitigation strategies.Islamic banks should proactively seek strategic alliances with P2P lending platforms to harness their potential for growth while fortifying their risk management frameworks.Overall, fostering collaboration between P2P lending and Islamic banks could help enhance financial resilience and stability, ultimately benefiting the broader economy.

Table 4 .
Peer-to-Peer fintech lending, Islamic bank and bank performance

Table 5 .
Peer-to-Peer fintech lending, Islamic bank and bank performance -Before vs during COVID-19

Table 6 .
Joint impact of Peer-to-Peer fintech lending and Islamic banks

Table 7 .
Joint impact of Peer-to-Peer fintech lending and Islamic banks -Before vs during COVID-19Peer-to-Peer Fintech lending and Islamic Banks, especially during the COVID-19 period, indicates that the adverse impact of increased growth loan disbursement from P2P lending on Islamic bank performance intensifies during economic uncertainty.This finding underscores the vulnerability of Islamic banks to external shocks and disruptions, such as those caused by the COVID-19 pandemic, within the realm of P2P lending.These results align with previous research highlighting Islamic banks' reduced competitiveness and lower market power compared to conventional banks, with the crisis further accentuating these differences(Ariss,2010; Alam et al., 2019; Beck et al., 2013; Olson & Zoubi, 2017; Yudaruddin, 2023b).