Stress test of credit risk using Monte Carlo simulation: Indonesian sharia rural banks

This study examines the influence of macroeconomic shocks on credit risk within Indonesian sharia rural banks for a period of January 2010 to March 2020. This study employs Monte Carlo simulations and the Error Correction Model (ECM). The results indicate that GDP growth, inflation, and exchange rate are significantly influence the Nonperforming financing (NPF) in the long term, while interest rate have a considerable impact on the NPF in the short term. Meanwhile, financing or credit growth has no substantial impact on the NPF in either the long term or short term. The stress test results indicate that Indonesian Islamic rural banks have a high probability of default with a forecasted NPF rate of 10.91%, a differential maximum NPF of 0.33 % at a confidence level of 95%. Therefore, it is suggested that the banks should note that the exchange rate has a strong effect on NPF, and anticipate the high probability of default with sufficient capital to cover losses.