The Relevance of Capital Structure Determinants and Sharia Compliance in Indonesia’s Dual Banking System

Abstract

This study examines the relevance of conventional capital structure determinants and the role of Sharia compliance in explaining capital structure decisions within Indonesia's dual banking system. Conventional capital structure theories, such as the Trade-Off Theory and Pecking Order Theory, were developed in interest-based financial systems and may not fully explain financing behavior in Islamic banking, where Sharia principles restrict the use of interest-bearing debt. Using panel data from eight Indonesian banks—four Islamic and four conventional—listed on the Indonesia Stock Exchange during the 2019–2025 period, this study investigates the effects of profitability, firm size, growth opportunities, tangibility, and Sharia compliance on capital structure. Panel data regression analysis was conducted using the Fixed Effect Model (FEM) with White Cross-section Robust Standard Errors. The findings indicate that profitability, growth opportunities, tangibility, and Sharia compliance have positive relationships with capital structure, while firm size has a negative relationship. However, none of these variables exhibit statistically significant effects. These results suggest that capital structure decisions in Indonesian banking cannot be sufficiently explained by conventional determinants or Sharia compliance alone. Other institutional, regulatory, and firm-specific factors are likely to play a more important role in determining leverage decisions. This study contributes to the literature by providing empirical evidence from Indonesia's dual banking system and highlights the need for future research to incorporate additional variables that better capture the institutional characteristics of Islamic banking.