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.