The greatest asset of banks is public trust so that it is necessary for the banks to convince public through improving their performance and meet standards set by the Financial Service Authority (OJK). This idea underlay a dissertation of Ayif Fathurranman, S.E., M.Si. entitled ‘Influence of Fractional Reserve Banking and Financial Variable on Performance and Health of Commercial Banks (Conventional and Sharia Banks) in Indonesia.’

Ayif’s research defense was conducted on Universitas Islam Indonesia on Monday (8/1) at Faculty of Economics of Universitas Islam Indonesia (UII), Condongcatur. Ayif, who is also a lecturer of Faculty of Economics and Business of Universitas Muhammadiyah Yogyakarta (UMY), pursued his doctoral degree with a high distinction result.

Ayif mentioned two reasons why he did research on that topic. “First, financial intermediary function is to enhance banks to implement fractional reserve banking practice and Sharia fractional reserve banking practice applied in Sharia banking in Malaysia and Gulf Cooperation Council (GCC) areas of the Middle East,” he declared.

Ayif Fathurrahman also explained that Fractional Reserve Banking (FRB) gives a very strong pressure on factor of declining performance and health of Sharia commercial banks in Indonesia. This was showed by strong pressure by all FRB variables on performance and liquidity risk of Sharia commercial banks.

“Based on my research findings, firstly it was revealed that the practice of Fractional Reserve Banking (FRB) in both conventional and Sharia banking was in different levels (severity). Secondly, the FRB yielded strong pressure on declining performance and health of commercial bank in Indonesia. Such condition raised potency of mismatch maturity and was caused by a number of credits disbursed by banking in Indonesia facing significant expansion. Nevertheless, the credit growth was still in normal condition and not included in a category of excessive redemption. This was proven by a good influence of credit growth on a national banking performance. Thirdly, the result also displayed that FRB gave a very strong pressure on the decreasing of Sharia commercial bank performance and health in Indonesia,” he explained.

The researcher also found that mismatch maturity and a bigger risk of “too big to fail” emerged in sharia commercial banks. It happened since a fact empirically showed that FRB practice in conventional commercial banks is relatively able to be controled and the influence is not significant on declining performance and liquidity risk of conventional commercial banks.

He added that the amount of finance distributed by Sharia banking in Indonesia also contributes to the performance improvement. “Nonetheless, at the same time, it gives pressure on liquidity risk of Sharia banking,” said Ayif.