Assessing the impact of economic uncertainty on Indonesia’s rural bank stability

Purpose: This study aims to investigate the effect of uncertainty on the smaller banking industry by analyzing the stability of both Islamic and conventional rural banks (CRBs) in Indonesia. Design/methodology/approach: This study uses a dynamic linear analysis through the autoregressive distributed lag framework. Rural bank stability is assessed using the Z-score, whereas economic uncertainty is measured by weighting macroeconomic indicators based on their volatility and conditional variance equation. Findings: Economic uncertainty affects the stability of both Islamic and CRBs in Indonesia, with CRBs being more negatively impacted than Islamic rural banks. Research limitations/implications: The findings suggest that economic uncertainty significantly influences the performance of smaller banks, underscoring the importance of maintaining a balanced financial system, especially community-based financial institutions, such as rural banks. Practical implications: Policymakers should establish frameworks to ensure the sustainability of rural banks, enabling them to continue serving underserved communities during economic disruptions. These measures could involve granting access to government-backed liquidity facilities and incorporating rural banks into comprehensive financial safety nets. Originality/value: This study underscores the importance of maintaining a balanced financial system by ensuring the smaller banking industry’s stability. It highlights a framework model for examining the resilience of rural banks amid economic uncertainty.