Does Loan Restructuring Play a Role in Increasing Credit Risk of Rural Banks during Covid-19 Pandemic?

Abstract

Comparing the impact of COVID-19 loan restructuring on credit risk at sharia and conventional rural banks, sharia banks operate under Islamic principles that prohibit charging interest, whereas conventional banks charge interest on loans. This study aims to examine the impact of loan restructuring on credit risk at a sharia and conventional rural bank in Surakarta during the COVID-19 pandemic. The study may investigate whether the differences in the banking systems affect the credit risk associated with loan restructuring. The study could have significant implications for rural banks and borrowers, particularly in countries with a large rural populations. Understanding the impact of loan restructuring on credit risk could help rural banks develop more effective strategies to manage risk and support borrowers during times of economic hardship. The research data uses panel data from quarter 1 to quarter 4 in 2020–2022. The test uses multiple linear regression analysis with random effect model selection. The study results show that restructuring negatively impacts the risk of problem financing in both sharia and conventional rural banks. Providing loan restructuring by financial authorities is appropriate to address the risk of default in rural banks. In summary, the study likely examines the impact of COVID-19 loan restructuring on credit risk at Sharia and conventional rural banks, focusing on understanding the differences between the two banking systems. Keywords: COVID-19, loan restructuring, financing risk, Sharia Rural Bank, Conventional Rural Bank