The Interest Prohibition and Financial Performance of Islamic Banks: Indonesian Evidence

Abstract

In the beginning 2004, Majelis Ulama Indonesia (Indonesia Ulema Council) released fatwa that definitely mentioned the proscribing of interest. In the period after fatwa, the main indicators of Islamic banks indicated a significant growth. Thus, the objective of this study is to investigate whether the financial performance of Islamic banks in the period before fatwa is different from that in the period after fatwa. Furthermore, this study intends to examine the comparative financial performance of Islamic banks and conventional banks in the period both before fatwa and after fatwa. In evaluating banks’ performance, this study used various financial ratios categorized as profitability, liquidity, risk and solvency, and efficiency. To determine the difference, this study used t-test. The result of this study indicates that, in general, comparison of financial performance of Islamic banks in the period before fatwa and after fatwa does not show statistically difference. Likewise, the result of inter-bank analysis also indicates that there is no major difference in performance between Islamic banks and conventional banks in the period both before fatwa and after fatwa

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