The impact of conversion on market share in Indonesian Islamic banks

Abstract

The process of converting a conventional bank into a fully-fledged Islamic bank is becoming a popular alternative solution, alongside spin-off, for smaller banks. Two Indonesian banks, Bank of Aceh Sharia and Bank of NTB Sharia, completed this conversion in 2016 and 2018, respectively. This study uses a mixed-methods approach to examine the impact of this conversion on market share, using both quantitative regression with a dummy variable and qualitative analysis through focus group discussions with executive management and in-depth interviews with the Sharia supervisory boards of the two converted banks. The study found that the conversion positively impacted market share, with the default rate and level of capital also playing a role. Prior to conversion, the Indonesian sharia banking industry had less than a 5% market share, but after the conversion, it reached 6.7%. The two converted banks were able to increase their market share to 7% and 2%, respectively. These results suggest that converting into a full-fledged Islamic bank is a viable alternative solution for smaller conventional banks, rather than opting for spin-offs or mergers.