Early Warning to Banking Crises in the Dual Financial System in Indonesia: The Markov Switching Approach

This research aims at detecting early indicators that cause conventional
banking and Islamic banking crises, identifying the longest crisis period for both types
of banks, and comparing the stability between the two kinds of banks. The method
used is the Markov Switching Vector Autoregressive (MS-VAR) approach. This study
uses secondary data obtained from official sources and in monthly form from January
2004 to March 2017. The results show that Islamic banking is more stable against
internal and external shocks than conventional banking. Z-score for Islamic banking is
higher (11,933) than the Z-score for conventional banking (11,679). The longest crisis
period for conventional banking was around April 2013 – March 2017 while for
Islamic banking was around January 2008 – October 2008.