Efficient Portofolio Composition of Indonesian Islamic Bank Financing

Transcription

1. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) Publisher http://jssidoi.org/esc/home EFFICIENT PORTOFOLIO COMPOSITION OF INDONESIAN ISLAMIC BANK FINANCING Nisful Laila1, Karina Ayu Saraswati2, Himmatul Kholidah3 1,2 Faculty of Economics and Business, Universitas Airlangga, Indonesia. 3 Faculty of Vocational Studies, Universitas Airlangga, Indonesia 3 Study Program of Doctoral Islamic Economic Science, Faculty of Economics and Business, Universitas Airlangga, Indonesia E-mails: 1 nisful.laila@gmail.com ; 2 karina.ayu-13@feb.unair.id ; 3 himmatul.kh@gmail.com Received 10 March 2019; accepted 10 July; published 30 September Abstract. The purpose of this research is to determine the composition of an efficient portfolio in the financing of ten Islamic banks. The theory of efficient portfolio by Markowitz is a modern portfolio theory used for analyzing the combination of various investment instruments to form efficient portfolio points at efficient frontier lines. The efficient composition portfolio measurement of Islamic bank in this study uses return, standard deviation, variance-covariance, correlation coefficient, and variation coefficient of investment instruments between 2011 and 2015. This study uses quantitative research achieved using Microsoft Excel. The result of this research shows that the average composition of an efficient portfolio of each Islamic bank is as follows: 48.62% for Mudharabah-Musyarakah, 41.63% for Murabahah, 8.03% for Ijarah, and 8.31% for Istishna. It can be seen that Mudharabah-Musyarakah and Murabahah are more dominant than the other financing types. Keywords: return; standard deviation; efficient portfolio; efficient frontier; Indonesia Reference to this paper should be made as follows: Laila, N.; Saraswati, K.A.; Kholidah, H. 2019. Efficient portofolio composition of Indonesian Islamic bank financing, Entrepreneurship and Sustainability Issues 7(1): 34-43. http://doi.org/10.9770/jesi.2019.7.1(3) JEL Classifications: Z23. Z29 1. Introduction Financing is an important function of all financial institutions and can be used as a source of income for Islamic banks. In performing its functions, it is important that Islamic banks pay attention to the ratios that affect the quality of financing. As quoted from the Islamic Finance Outlook in 2015, the Financing to Deposit Ratio (FDR) for Islamic banks remained above 96%, when compared to conventional banks which remained between 60 to 90%. Further, of the third-party funds received by Islamic banks, 96% of it was channeled for financing. However, the various financing issues faced by Islamic banks are largely caused by the Non-Performing Financing (NPF) ratio, which typically sits between 2% and 4%. According to Obaidullah (2015), there are three types of Islamic financing: equity based financing, debt-based financing and service-based financing. Table 1 demonstrates that the Murabahah bank is the most preferred Islamic bank in Indonesia. 34
2. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) The provision of finance is a banks’ most important function when it comes to earning profit, however, financing also exposes banks to different types of risk. In order to reduce the risks associated with financing, Islamic banks need to employ a meaningful diversification regime. Banks need to establish a wide-ranging portfolio, through the selection of a combination of assets so as to reduce risk without reducing the return, or the rate of return, received. Table 1. Islamic Financing Instrument Portion in Islamic Banking Industry (In percentage) Year Mudharabah Musyarakah Murabahah Ijarah Istishna 2011 18.46 9.96 54.90 0.31 3.73 2012 18.75 8.15 59.66 0.25 4.97 2013 21.65 7.39 60 0.31 5.69 2014 24.74 7.42 59.23 0.33 4.94 2015 27.74 7.32 57.96 0.38 4.49 Source: Statistics of the Financial Services Authority in December 2015, taken from www.ojk.go.id , reprocessed As financial institutions, Islamic banks have the power to determine the amount of finance provided in accordance with the risk associated with each transaction, whilst complying with the rules set by the Financial Services Authority. It is important for Islamic banks to employ policies within their business to determine the composition of their finance portfolio, in a way that offers high returns with certain risks or low returns with low risks. This is known as an efficient portfolio. In order to achieve an efficient finance portfolio, Islamic banks must collect important information about the characteristics of assets which will be included in the portfolio, such as the expected returns, the risk involved and the proposed benefit to the bank. The research question addressed in this paper explores how to create an efficient portfolio in Islamic banks. 2. Theoretical Framework 2.1. Islamic Financing Instrument There are five types of financing used in this research, namely Mudharabah financing, Musyarakah financing, Murabahah financing, Ijara financing and Istishna financing. Mudharabah financing is a fund investment transaction from the Shahibul Maal (owner of the fund) to the Mudharib (fund manager) to conduct certain Islamic-compliant business activities, with shares being held in the company by the two parties, based on the nisbah (ratio) agreed beforehand (Obaidullah 2015: 41). Alternatively, Musyarakah financing is a form of business which involves two or more parties combining all forms of tangible and intangible resources. The parties provide contributions in the form of funds, trade goods, entrepreneurship, intelligence, ownership, equipment and other non-monetary goods (Karim, Adiwarman 2007: 102). Murabahah financing is an akad (contract) for the purchase and sale of goods, which states the price of acquisition and profit (margin) as agreed by the seller and buyer (Karim, Adiwarman 2007: 113). Istishna financing is an akad of sale and purchase in the form of ordering certain goods with certain criteria and requirements, as agreed between the one who ordered (buyer, mustashni') and the seller (maker, shani') (DSNMUI Fatwa). The last is Ijarah financing, which is an akad for transferring the right to use certain goods or services within a certain time through the payment of rent /wages, without the ownership of the goods themselves being transferred. 35
3. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) 2.2. Efficient Portofolio Theory and Optimum Portfolio Jones (2000) states that an efficient portfolio is a portfolio with the same level of profit and a lower risk, or with the same risk that provides a higher rate of return. Unlike an efficient portfolio, an optimum portfolio is a portfolio that an investor chooses from many options that exist in an efficient portfolio set. Surely, the portfolio selected by investors in this case is the portfolio of an Islamic bank in accordance with the preference of investors. When creating an investment portfolio, investors always seek to maximize their expected return, whilst leveraging that on a certain level of risk, often looking for a portfolio that offers the lowest risk and a certain amount of RoR (Pirzada 2017; Aktan et al. 2018). This particular portfolio is called an efficient portfolio. To establish an efficient portfolio, we must assume the behavior of investors in making investment decisions. One of the most important assumptions is that no investor likes excessive risk (risk aversion). Meanwhile, investors are more likely to choose an optimal portfolio from the efficient portfolio (Marcowitz 1991). 2.3. Risk and Return Portfolio Theory Risk–return portfolio theory is commonly used in finance to analyze the RoR and the expected return of one instrument and set of instruments; in this case, the instrument is the finance provided by Indonesian Islamic banks. Moreover, it may also inform the probability of occurrence of an instrument and coefficient of correlation, as two of the pre-requisite elements are used to calculate risk and return of one and group of the financing instrument(s). This paper uses the risk-return portfolio theory to identify the risk of a financing instrument using the variance of actual and expected return. Following this, the risk of various financing instruments are also identified from the variance of actual and expected return (Ismal, 2008, 2010, 2014; Chen, Yuan 2016; Kunitsyna et al. 2018). 3. Research Methodology This research uses a quantitative approach using the Markowitz model portfolio which is processed using Microsoft Excel and the Solver application. The operational definition of the research variables are as follows (Table 2) (Horne, 2001) Table 2. Research variables EQUATION 1. Individual Return Realization: NOTES 2. Individual Expected Return: = expected rate of return from j financing = actual rate of return from j financing = amount of possible occurring event 3. Portfolio Expected Return = the rate of expected return of the portfolio = the proportion from asset i towards the whole portfolio asset = the rate return of each asset i = number of single securities = standard deviation = the rate of financing actual return 4. Individual Standard Deviation 36
4. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) = average rate of financing expected return = total historical data observation for large sample with n (at least 30 observations) and for small sample (n-1) = the variance of portfolio profit 5. Portfolio Standard Deviation = invested fund proportion to asset i = invested fund proportion to asset j = the variance of profit asset i = covariance of asset i and asset j 6. Covariance = covariance between security A and B = A return securities of i = B return securities of j = expected return of security A = expected return of security B = total historical data observation for large sample (at least 30 observations) and for small sample (n-1) = correlation coefficient between security i and j 7. Correlation Coefficient = covariance between security i and j = standard deviation security i To establish an efficient portfolio, this research uses the Microsoft Excel spreadsheet application. The researcher uses a feature in Microsoft Excel named Solver that can be used to search for the most efficient combination of variables whose size is unknown, by determining limitation or certain constraints first. The limitation or constraints conducted in establishing an efficient portfolio are as follows: a. Minimize portfolio risk. b. Proportion size for each investment is more than or equal to zero. c. The total weighted average for each type of financing is 100%. d. Size of certain returns, starting from the type of investment that results in the smallest to largest return. The population in this research is Islamic banks in Indonesia. According to the data collected by the Bank of Indonesia in 2015, there are currently 12 Islamic banks. This research uses purposive sampling as the sampling technique. Researchh Sample is presented in Table 3. The criteria of this research selection samples are as follows: i. Islamic banks which operated in Indonesia between 2011 and 2015. ii. Banks with a financial report published between 2011 and 2015. iii. Islamic banks with completed data based on the examined variables. Table 3. Research Sample Names of Islamic Banks Bank BNI Syariah Bank Muamalat Indonesia Bank Bukopin Syariah Bank Jabar Syariah Bank Panin Syariah Bank Syariah Mandiri Bank BCA Syariah Bank Victoria Syariah Bank BRI Syariah Bank Mega Syariah 37
5. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) 4. Result and Discussion 4.1. Description of Research Results 4.1.1. Calculating of Average Return and Standart Deviation The calculation of the average return and standard deviation of the finance activities of the Mudharabah Musyarakah, Murabahah, Ijarah, and Istishna banks of Muamalat, Indonesia is calculated using quarterly financial statements for the period of 2011-2015. The data that has been used is financing data and financing income. The results of the actual return expected return and standard deviation are shown in Table 4. Table 4. Average Return and Standard Deviation MEAN Bank St.Dev BMI MudharabahMusyarakah 0.09 Murabahah Ijarah Istishna 0.99 0.12 0.11 MudharabahMusyarakah 0.18 BRIS 0.09 0.12 0.50 0.14 0.02 0.02 1.44 0.08 BSM 0.11 0.10 0.76 0.09 0.01 0.02 0.84 0.05 BJBS 0.11 0.11 0.29 0.13 0.02 0.03 0.28 0.39 BCAS 0.08 0.08 0.38 - 0.03 0.03 0.24 - BNIS 0.09 0.11 0.15 - 0.01 0.02 0.14 - BVS 0.07 0.10 0.67 - 0.07 0.05 0.82 - BSB 0.10 0.10 0.09 - 0.04 0.01 0.05 - BPS 0.09 0.10 - - 0.02 0.05 - - BMS 0.12 0.18 - - 0.10 0..04 - - Murabahah Ijarah Istishna 0.02 0.16 0.06 Table 4 shows that the average return of financing at Islamic banks has various values. It also shows that Ijarah financing has the highest return compared to the other financing types. Whether a return rate is high or low is inseparable from the contained risk rate. It is shown that Ijarah financing produces the highest return however, it also has the highest risk. The supports the concept of high risk and high return. 4.1.2. Establishment of an Efficient Portfolio Composition After obtaining the average value of returns, standard deviation, correlation, and the covariant of all types of finance options, an efficient portfolio combination can be established by using the Solver application. The result of that calculation are presented in Table 4. The results show that Ijarah financing has the smallest proportion compared to the other financing, although the return of Ijarah financing in Islamic banks is the highest. This is likely the result of using the Markowitz theory of efficient portfolio which focuses only on risk and return, whilst ignoring other factors. The extreme fluctuation on returns experienced by Ijarah financing, ranging between the highest and lowest level, suggests that the higher the risk, the higher the average return will be compared to the other types of investments. In establishing an efficient portfolio, Ijarah financing must be reduced into the lowest proportion. However, the highest proportion is found in Murabahah financing. Murabahah financing is able to minimize the risk involved by determining the margin in the beginning of the contract by the Islamic bank. This provides the Islamic bank with certainty of income. In addition, Murabahah financing does not require much effort and coordination when compared to Mudharabah-Musyarakah financing. Hence, the results of the Markowitz’s portfolio theory assume that the risk is still low. This is also emphasized by the average return of Murabahah 38
6. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) financing, which is relatively stable, and does not fluctuate a great deal. Hence, it is assumed that the deviation of reaching the expected return is small. Bank Table 5. Efficient Portfolio Composition of Each Islamic Banks MudharabahStd.Dev E[r] Murabahah Ijarah Musyarakah Istishna BMI 1.48% 10.24% 34.41% 39.85% 6.85% 18.89% BRIS 2.88% 12.32% 9.61% 83.57% 1.00% 5.83% BSM 1.71% 11.72% 92.05% 1.00% 1.19% 5.76% BJBS 2.14% 12.55% 67.83% 21.86% 7.54% 2.77% BCAS 2.73% 10.27% 45.48% 48.95% 5.57% - BNIS 1.29% 10% 83.45% 11.08% 5.47% - BVS 4.27% 12.2% 14.08% 82.34% 3.58% - BSB 1.45% 10% 28.28% 38.69% - 33.03% BPS 2.47% 9.30% 98.88% 1.12% - - BMS 4.43% 18.08% 12.16% 87.84% - - 4.2. Efficient Frontier Curve After identifying the combination of portfolio proportions, that combination is plotted into the graph in which the X axis (horizontal) is the standard deviation and the Y axis (vertical) is the expected return on the portfolio. If the points which are the combination of the investment portfolio are linked, they will form a curve called an efficient frontier curve, as shown in Figure 1. This study assumes that investors are rational and risk averse and hence will choose a portfolio with a higher return when compared to the risk involved. Therefore, a portfolio which is plotted under an efficient portfolio point in an efficient frontier curve of each bank is a non-efficient curve. Conversely, a portfolio which is laid above an efficient portfolio point in an efficient frontier curve of each bank is an efficient frontier. As shown in the efficient frontier curve of the 10 Islamic banks, excluding Bank Mega Syariah, all of the banks share the same convex upward curve. This is consistent with Markowitz’s theory that the higher the rate of return is expected to increase, then the higher the risk that the investors will be willing to take, i.e., high risk and high return. Compared to the other banks, the curve shape of the Bank BRI Syariah is more linear, while the curve shape of the Bank Syariah Bukopin is more convex. This is because the correlation of the return rate of the Bank BRI Syariah has a positive correlation, and the correlation of the return rate of the Bank Syariah Bukopin has a negative correlation. This is different from the Bank Mega Syariah, which has convex-to-the-bottom-right efficient frontier curve, as shown in Figure 1. This demonstrates that the portfolio status is not more efficient. This may be due to the number of bad debts reflected in the NPF ratio on the Bank Mega Syariah. This produces an efficient frontier curve for the Bank Mega Syariah, which is different from the other Islamic banks. 39
7. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) Figure.1. Frontier Efficient Curves of Islamic Banks 40
8. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) 5. Discussion 5.1. Efficient Portfolio Target In essence, portfolio management consists of three main activities: (1) making a decision of asset allocation, (2) determining the portion of funds which will be invested in each asset class, and (3) choosing assets from each selected asset class. In Markowitz’s portfolio model, portfolio selection consisting of individual assets is used. The individual assets used in this research are Mudharabah-Musyarakah, Murabahah, Ijarah, and Istishna financing, which exist in each Islamic bank. The aim of making a portfolio is to diversify the risk within a portfolio, to achieve a portfolio with the lowest risk, or to obtain a combination of high returns with low risk. The creation of a portfolio in this research aims to achieve the lowest risk, which is chosen by the standard deviation, or the lowest variance. The portfolio with this lowest risk is called the minimum variance portfolio (MVP). This section will describe the target of an efficient portfolio from an efficient set based on 10 Islamic banks as shown in Table 5. This demonstrates that the Bank Muamalat Indonesia will achieve an efficient portfolio with a risk rate of 1.48% and a return rate of 10.24%, which represents a proportion of 34.41% of MudharabahMusyarakah financing, 39.85% of Murabahah financing, 6.85% of Ijarah financing, and 18.89% of Istishna financing. The same thing occurs in the Bank Jabar Syariah, which will achieve an efficient portfolio if it employs 67.83% of Mudharabah-Musyarakah financing, 21.85% of Murabahah Financing, 7.54% of Ijarah financing and 2.77% of Istishna financing with a portfolio return of 12.55% and a portfolio risk of 2.14%. From the results shown in Table 5, it can be seen that the average financing of Mudharabah-Musyarakah from each of the Islamic banks is 48.62%, Murabahah financing is 41.63%, Ijarah financing is 8.03%, and Istishna financing is 8.31%. This shows that Mudharabah-Musyarakah financing and Murabahah financing are more common than Ijarah financing and Istishna financing. 6. Conclusion Based on the results of the analysis and discussion, it can be concluded that every kind of Islamic bank financing in Indonesia requires a different composition in order to provide finance options with minimum risk. However, the average financing of Mudharabah-Musyarakah is higher than the other types. Therefore, it is important for banks to pay more attention to the expansion of investments and consider using more Mudharabah-Musyarakah. In addition, risk mitigation is important to consider when dealing with high risk financing, particularly with respect to Ijarah financing. This can be achieved by monitoring the concentration of finance portfolios, focusing on the most interesting and rapidly developing industrial sectors in Indonesia and developing organizational structures that are providing the finance to these sectors. This study calculates the composition of an efficient portfolio for each Islamic bank between 2011 and 2015. The results show that the average of Mudharabah-Musyarakah financing from each Islamic bank is 48.62%, Murabahah financing is 41.63%, Ijarah financing is 8.03 % and Istsihna financing is 8.31%. 41
9. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) References Acharya, V. V.; Saunders, A.; Iftekhar, H. 2002.“Should Banks be Diversified?”. BIS Working Papers. http://dx.doi.org/10.2139/ssrn.293295 Ali, Salman Syed. 2005. “Islamic Capital Market Products: Developments and Challenges”. Islamic Research and Training Institute. Occasional Paper No. 9. ISBN 978-9960-32-179-0 https://www.isfin.net/sites/isfin.com/files/islamic_capital_market_products_developments_and_challenges.pdf Aktan B.; Turen S.; Tvaronaviciene M.; Celik S.; Alsadeh H.A. 2018. Corporate governance and performance of the financial firms in Bahrain, Polish Journal of Management Studies 17(1): 39–58. https://doi.org/10.17512/pjms.2018.17.1.04 Chen, J.; Yuan, M. 2016. Efficient Portfolio Selection in a Large Market, Journal of Financial Econometrics 14(3): 496–524. https://doi.org/10.1093/jjfinec/nbw003 Guerard, J. B., Markowitz, H, Xu, G. 2013. Global Stock Selection Modeling and Efficient Portfolio Construction and Management, The Journal of Investing 22(4): 121-128. https://doi.org/10.3905/joi.2013.22.4.121. Horne, J. 2001. Fundamental of Financial Management: 12th Edition. ISBN 978-979-691-266-3. https://www.amazon.com/FundamentalsFinancial-Management-James-Horne/dp/8120338979 Ismal, R. 2008. “The Potential of Liquidity Risk in Islamic Banking”. Academic Paper, Presented in Ustinov College Seminar of Finance, Durham University. http://etheses.dur.ac.uk/550/ Ismal, R. 2014. An Optimal Risk – Return Portfolio of Islamic Bank, Humonomics, 30(4): 286-303. https://doi.org/10.1108/H-08-20130055. Ismal, R. 2010. The Indonesian Islamic Banking (Theory and Practices). Bogor: Phd http://malcat.uum.edu.my/kip/Record/ukm.vtls003587975 Gramata Publishing. ISBN 978-602-8986-20-6. Jones, Ch. P, 2000. Investment: Analysis and Management, Tenth Edition. New York: John Willey and Sons.Inc. ISBN 0471-331-14-7. http://bcs.wiley.com/he-bcs/Books?action=index&itemId=0471456667&itemTypeId=BKS&bcsId=1720 Karim, A. Adiwarman. 2007. Islamic Microeconomics. Second Edition. Jakarta: PT. Raja Grafindo Persada. ISBN 97-8979-697-38-9 Kunitsyna, N.; Britchenko, I.; Kunitsyn, I. 2018. Reputational risks, value of losses and financial sustainability of commercial banks, Entrepreneurship and Sustainability Issues 5(4): 943-955. http://doi.org/10.9770/jesi.2018.5.4(17) Marcowitz, H.M. 1991. Foundations of Portfolio Theory, Journal of Finance Teknik Perhitungan Bagi Hasil di Bank Syariah. Yogyakarta: UII Press. ISBN 979-841-369-5. Obaidullah, M. 2015. “Islamic Financial Services”. Islamic Economics and Research Center, King Abdul Aziz, University Jeddah, Saudi Arabia. ISBN 978-9960-064-28-4. Pirzada, K. 2017. Effects of Dividend Policy on Stock Price Volatility in the Financial Sector, Journal of Finance and Banking Review 2(2): 34-48. ISSN 0128-3103. http://gatrenterprise.com/GATRJournals/effects_of_dividend_policy_on_stock_price_volatility_in_the_financial_sector.html 42
10. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2019 Volume 7 Number 1 (September) http://doi.org/10.9770/jesi.2019.7.1(3) Nisful LAILA is an assistant professor of Islamic Finance and Economics and vice dean for cooperation and reserch, faculty of Economics and Business, Universitas Airlangga. Her research interest is on Islamic finance, Islamic banking and Islamic social finance. Karina Ayu SARASWATI is a banker alumny of faculty of Economics and Business, Universitas Airlangga. Her research interest is on banking and finance. ORCID ID: https://orcid.org/0000-0001-7985-7370 Karina Ayu SARASWATI ORCID ID: https://orcid.org/0000-0001-5454-700X Author ID: 57190379353 Himmatul KHOLIDAH is a lecturer and researcher of Vocational faculty, Universitas Airlangga, currently a PhD student in Islamic Economics, Faculty of Economics and Business Universitas Airlangga. Her research interest is on Islamic banking, Islamic economics and halal tourism. ORCID ID: https://orcid.org/0000-0001-5723-3292 ___________________________________________________________________________________________ Copyright © 2019 by author(s) and VsI Entrepreneurship and Sustainability Center This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/ 43