Determinants of capital structure policy in conventional and Islamic banks: Evidence from Indonesia

Purpose- This study examines the determinants of capital structure in Indonesian banks by analyzing the effects of profitability, bank size, growth, and asset tangibility, while comparing capital structure policy between conventional and Islamic banking systems. Methodology- This research utilizes panel data regression using a sample of 28 conventional banks and 9 Islamic banks observed over a four-year period (for the year 2021-2024), resulting in 148 bank-year observations. Separate regression models are estimated for conventional and Islamic banks to capture differences in capital structure determinants. Findings- The results show that profitability negatively affects capital structure in conventional banks, supporting the Pecking Order Theory, while it has a positive effect in Islamic banks, consistent with the Trade-Off Theory. Bank size negatively influences capital structure in conventional banks but positively affects it in Islamic banks. Growth is insignificant for conventional banks but positively associated with capital structure in Islamic banks. Asset tangibility increases financial leverage of conventional banks, but it has no significant effect on Islamic banks’ capital structure. Conclusion- The study concludes that capital structure decisions differ fundamentally between conventional and Islamic banks in Indonesia. Conventional banks’ policy is better explained by the Pecking Order Theory, whereas Islamic banks follow a Trade Off Theory. These findings indicate the importance of adopting institution-specific capital policies in dual banking systems. Keywords: Capital structure, banking sector, profitability of banks, bank size, Islamic and conventional banks.