Impact of Investment Model to Profitability

In the wake of global financial crisis, many conventional banks collapsed, while Islamic banks survived. The flexibility of Islamic banks to adjust their financing portfolio using various investment models (profit-and-loss sharing ‘PLS’ financings, as well as trade ‘non-PLS’ financings) will be analyzed first using Markowitz-Tobin model to obtain optimal financing portfolio (OFP), and second using Altunbas, et al. (2011) model to determine Islamic bank’s strategies to generate returns during financial crisis based on previous OFP results.

Tentative results show that in time of crisis Islamic banks could apply different strategies to survive. Bank Muamalat Indonesia (BMI) applied fox-armadillo strategy by shifting it’s mostly PLS financing into some non-PLS financing as its safe house during the crisis. Bank Syariah Mandiri (BSM) applied sailing-surfing strategy by shifting it’s mostly non-PLS financing into more PLS financing which has much greater flexibility. CIMB Niaga Syariah (CIMB) applied maximized-the-advantage strategy by exploiting its best financing performance, murabahah non-PLS financing. Moreover, based on Altunbas, et al. (2011) model, all Islamic banks lie on “fake” alpha or hidden beta (hidden tail risk) quadrant where Islamic banks show higher than average market-to-book value in pre-crisis period (ex-ante) which also encounter higher level of risk during the crisis (ex-post).