Household telecommunication spending and financing risk at small Islamic banks: evidence from Indonesia

What the paper says

Purpose The purpose of this study is to investigate the influence of telecommunication expenditure by households at the provincial level on nonperforming financing (NPF) at small Islamic banks in Indonesia. Design/methodology/approach To test the hypothesis, the authors selected 143 small Islamic banks in Indonesia. They used fixed effects panel regression because: it enables us to observe the same small Islamic banks over the period 2016–2021, and these banks have distinctive characteristics (e.g. cultural and managerial aspects) that are unchanged over time. Findings The analysis reveals a negative relationship between household telecommunication expenditure at the provincial level and NPF (default) at small Islamic banks (significant at 1%). Because the model might not consider the influence of unobservable factors, such as opinions, attitudes and beliefs that contribute to NPF, it has an endogeneity problem, specifically, omitted variable bias. To address this issue, the authors perform a two-stage least squares regression and find that the results are similar to those of the initial regression. Practical implications Banks that intend to expand into new areas could forecast financing risk using telecommunications spending data specific to those locations, as it can serve as an alternate approach for reducing initial screening costs. The authors recommend that the government, which is the regulator and internet service provider: reduce the cost of internet services to enable greater public participation in online business and banking transactions, thereby enhancing bank performance; and enhance communication infrastructure and increase internet speed to facilitate broader individual connectivity and engagement in business activities, which will further improve banking performance. The authors recommend that Islamic banks not only increase their investment in information technology infrastructure but also improve the quality of their internet and mobile banking services to mitigate information asymmetry. Originality/value Previous research has extensively investigated the influence of both internal and external factors on credit (financing) risk or nonperforming loans (NPL) at conventional and Islamic banks. However, the impact of telecommunication expenditure by households at the provincial level on financing risk has not been thoroughly investigated.