The impact of inflation on Islamic banks’ home financing risk: Before and during the COVID-19 outbreak

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The COVID-19 outbreak has had a severe impact on nearly all industries, including Islamic banking, which plays a significant role but is exposed to higher risk. This study aims to evaluate the credit risk that Islamic banks in Indonesia have been exposed to related to home financing before and during the COVID-19 outbreak. Panel data are employed covering the period January 2016 to September 2020 on a monthly basis. The data were analyzed using a dynamic panel approach to present a distinct picture of Sharia-compliant property financing before and during the COVID-19 outbreak. In general, the findings show that the macroeconomic variable reflected by regional inflation has had a different influence in the two periods, with Islamic banks having had much more exposure to macroeconomic risk, specifically in home financing, during the epidemic. In addition, the different influences are also shown by the study results, which show that provinces on Java Island face less risk exposure than those outside Java. In terms of impulse response factors and variance decompositions’ result, before the outbreak, the response of home financing risk to inflation tended to be more stable. However, during the outbreak, the movement has tended to fluctuate more, especially outside Java Island. The same result for variance decompositions shows a similar trend, with inflation tending to have a larger impact during the outbreak.

Acknowledgments
We are grateful to the Direktorat Penelitian dan Pengabdian Masyarakat (DPPM) Universitas Islam Indonesia No. 001/Dir/DPPM/70/Pen.Unggulan/XII/2020 for support and providing a research grant for the study.

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    • Figure 1C. Before the COVID-19 outbreak (Java Island)
    • Figure 2C. Before the COVID-19 outbreak (outside Java Island)
    • Figure 3C. During the Covid-19 outbreak (Java Island)
    • Figure 4C. During the COVID-19 outbreak (outside Java Island)
    • Table 1. Data description
    • Table 1A. Panel unit root test results
    • Table 1B. PVAR results
    • Table 1D. Before the COVID-19 outbreak
    • Table 2D. During the COVID-19 outbreak
    • Conceptualization
      Faaza Fakhrunnas, Yunice Karina Tumewang, M. B. Hendrie Anto
    • Data curation
      Faaza Fakhrunnas, Yunice Karina Tumewang
    • Formal Analysis
      Faaza Fakhrunnas
    • Funding acquisition
      Faaza Fakhrunnas, Yunice Karina Tumewang, M. B. Hendrie Anto
    • Investigation
      Faaza Fakhrunnas, Yunice Karina Tumewang
    • Methodology
      Faaza Fakhrunnas
    • Resources
      Faaza Fakhrunnas
    • Software
      Faaza Fakhrunnas
    • Supervision
      Faaza Fakhrunnas, M. B. Hendrie Anto
    • Validation
      Faaza Fakhrunnas, M. B. Hendrie Anto
    • Writing – original draft
      Faaza Fakhrunnas, Yunice Karina Tumewang
    • Visualization
      Yunice Karina Tumewang
    • Writing – review & editing
      Yunice Karina Tumewang
    • Project administration
      M. B. Hendrie Anto