Non-risk-sharing financing in Indonesian Islamic banks: the role of market power

Most Islamic banks provide more non-risk-sharing financing, which is nothing but debt financing like the loan of conventional banks. They favor this financing due to low-risk financing. Our study investigated the determining factor of non-risk-sharing financing in Indonesian Islamic banks using panel regression with unbalanced data, consisting of 31 banks and employing data from 2015:Q1-2020:Q4. The findings indicated that market power strengthens non-risk-sharing financing. This finding indicated that the more uncompetitive the market is, the more Islamic banks tend to favor non-risk-sharing financing. However, bank stability reduces nonrisk-sharing financing, indicating that more stable banks prefer risk-sharing financing. This reason is reinforced by the reverse relationship between nonrisk-sharing financing and bank size. Furthermore, this study documented that the impact of market power on non-risk-sharing financing diminishes as high stability holds. Evidence also highlighted that the effect of market power and stability on non-risk-sharing financing was more prominent for Islamic bank windows than full-fledged Islamic banks.