Institutional Type, Food Security Index, and Rural Banks Performance: Evidence from Java and Sumatera

Abstract

This study examines how institutional type, Islamic versus conventional rural banks, and regional food security jointly affect Indonesian rural bank performance, and whether institutional type moderates this relationship. Using an unbalanced panel of 1,130 rural banks, 1,008 conventional and 122 Islamic, in Java and Sumatra, 2019-2024, with 6,769-6,775 observations, financial data from OJK, Otoritas Jasa Keuangan, were merged with district-level Food Security Index, IKP, from Badan Pangan Nasional. Random Effects regression with clustered standard errors was estimated in Stata, guided by Breusch-Pagan LM and Hausman tests, with moderation visualized via margins. IKP is positively associated with non-performing loans, especially in Java, and negatively with return on assets. Islamic Rural Banks show a lower-risk, lower-return profile than conventional banks at average IKP and are less exposed to credit risk rising with IKP in Java, ending up safer across most Java districts. A similar, weaker pattern appears for profitability in Sumatra. Rural bank performance in Indonesia is jointly shaped by institutional type and regional food security, but channel and direction differ between Java and Sumatra, neither is a uniform determinant. The correlational design and Random Effects estimator, necessitated by time-invariant institutional status, limit causal interpretation and testing of loan-level mechanisms. This study documents a region-specific food-security-performance relationship in Islamic banking, informing OJK and rural bank strategy, and shows how interaction-term specification shapes institutional-type interpretation.