# Influence of spin-off decision on financing risk: Empirical insight from Indonesian Islamic banks

## TL;DR

This study finds that spin-offs in Indonesian Islamic banks reduce financing risk, improving financial resilience and investor appeal.

## Contribution

The study empirically demonstrates that spin-off decisions significantly lower financing risk in Indonesian Islamic banks.

## Key findings

- Spin-offs significantly reduce financing risk in Indonesian Islamic banks.
- Islamic windows have higher financing risk compared to fully-fledged Islamic banks.
- Larger asset spin-off banks show greater risk than smaller ones.

## Abstract

Spin-offs play a significant role in organizational development strategies, particularly in Islamic banking, by fostering entrepreneurship, innovation, and Shariah-compliant management practices. Indonesia stands as a pioneer in implementing the dual banking system and has established a spin-off policy to foster the growth of Islamic banking. This study investigates whether the spin-off decision has a significant impact on financing risk in Indonesian Islamic banks.

Financing risk is measured by the non-performing financing ratio, while the spin-off decision is represented by a dummy variable equal to 1 for the post-spin-off period and 0 for the pre-spin-off period. This study utilizes data from semi-annual reports of 35 Indonesian Islamic banks and analyzes it using a dynamic panel model with the Generalized Method of Moments (GMM).

The findings reveal that spin-offs significantly reduce financing risk, thereby enhancing the financial resilience and boosting investor appeal. Notably, this implies that Islamic banks operating as Islamic windows exhibit a higher level of financing risk compared to fully-fledged Islamic banks. Furthermore, a noteworthy pattern emerges that spin-off Islamic banks with substantial assets demonstrate greater risk in comparison to their counterparts with more modest assets. System GMM also confirmed the result.

Islamic banks can significantly reduce their financing risks by establishing independent Islamic banks, or spin-offs. Unlike Islamic windows, which are typically integrated within conventional banks and face higher risk levels, standalone Islamic banks offer greater flexibility and control over their operations.