CONTROLLING PROBLEMATIC FINANCING: EFFORTS TO IMPROVE THE PROFITABILITY OF ISLAMIC BANKING THROUGH THE TWO STAGE LEAST SQUARE APPROACH
DOI:
10.54443/ijerlas.v4i4.1797Published:
2024-07-30Downloads
Abstract
The issue discussed is whether there is still a discrepancy or divergence between problematic financing (NPF) and profitability (ROA) from the general trend. On the other hand, Non-Performing Financing (NPF) and Return on Assets (ROA) interact in ways that significantly affect the financial performance of banks. This indicates the complexity of this relationship, suggesting a simultaneous relationship between NPF and ROA. The aim of this research is to understand the simultaneous relationship between profitability and problematic financing of Islamic banks in Indonesia. This study uses the Two Stage Least Square (TSLS) method, with financial ratio data from Islamic banks in Indonesia from 2010 to 2023, using quarterly data. Based on the simultaneous test results, there is a simultaneous relationship between the profitability model (ROA) and problematic financing (NPF). In the profitability equation model (ROA), BOPO affects the profitability of Islamic banks, while problematic financing and CAR do not have an effect. However, in the problematic financing equation model (NPF), profitability and CAR affect problematic financing in Islamic banks in Indonesia, whereas FDR does not affect operational cost reduction targets. Moreover, policies that emphasize increasing profitability through product diversification and capital enhancement (CAR) will help reduce the risk of problematic financing through issuing new shares or reinvesting profits, while product diversification can help increase revenue and reduce the risk of uncollectible financing.
Keywords:
Problematic Financing, Profitability, Two Stage Least SquareReferences
Abdullah, R. S., & Nasirin, W. K. (2022). Types Of Linkages Between Islamic Bank Financing, Interest Rate And Economic Growth Factors: Evidance From Aceh Province With Granger Causality Test. Al-Bay’: Journal of Sharia Economic and Business, 1(2). https://doi.org/10.24952/bay.v1i2.6001
Abdullah, W. A. W. (2013). Shari’ah disclosures in Malaysian and Indonesian Islamic banks:The Shari’ah governance system. Journal of Islamic Accounting and Business Research, 4(2), 100–131. https://doi.org/10.1108/JIABR-10-2012-0063
Alzoubi, T. (2018). Determinants of bank profitability: Islamic versus conventional banks. Banks and Bank Systems, 13(3), 106–113. https://doi.org/10.21511/bbs.13(3).2018.10
Badar, M., & Javid, A. Y. (2013). Impact of Macroeconomic Forces on Nonperforming Loans: An Empirical Study of Commercial Banks in Pakistan. WSEAS Transactions on Business and Economics, 10(1), 9.
Belkhaoui, S., Alsagr, N., & van Hemmen, S. F. (2020). Financing modes, risk, efficiency and profitability in Islamic banks: Modeling for the GCC countries. Cogent Economics & Finance, 8(1), 1750258. https://doi.org/10.1080/23322039.2020.1750258
Faculty of Economics, University of Zenica, 72000 Zenica, Bosnia and Herzegovina, & Alihodžić, A. (2022). Internal And External Factors Of Non-Performing Loans: The Example Of The Banking Sector In Bosnia And Herzegovina. Balkans Journal of Emerging Trends in Social Sciences, 5(2), 93–104. https://doi.org/10.31410/Balkans.JETSS.2022.5.2.93-104
Fatimah, N., & Izzaty, K. N. (2022). Analisis Pengaruh Faktor Internal dan Faktor Eksternal Terhadap Non Performing Financing (NPF) Pada Bank Umum Syariah di Indonesia. JIEF : Journal of Islamic Economics and Finance, 2(2), 51–66. https://doi.org/10.28918/jief.v2i2.5702
Hamidi, M. L., & Worthington, A. (2020). Islamic Banking in Indonesia: Emergence, Growth, and Prospects (hlm. 38–60). https://doi.org/10.4018/978-1-7998-1611-9.ch003
Harjanti, W., & Farhan, A. (2021). The Effect of FDR, NPF and Liquidity Ratio on Profitability of Islamic Banks in Indonesia. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), 4(4), Article 4. https://doi.org/10.33258/birci.v4i4.3444
Ho, C. S. F. (2019). External and internal determinants of performances of Shariah and non-Shariah compliant firms. International Journal of Islamic and Middle Eastern Finance and Management, 12(2), 236–253. https://doi.org/10.1108/IMEFM-08-2017-0202
Hosen, M. N., Jie, F., Muhari, S., & Khairman, M. (2019). The Effect of Financial Ratios, Maqasid Sharia Index, and Index of Islamic Social Reporting to Profitability of Islamic Bank in Indonesia. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 11(2). https://doi.org/10.15408/aiq.v11i2.11588
Laryea, E., Ntow-Gyamfi, M., & Alu, A. A. (2016). Nonperforming loans and bank profitability: Evidence from an emerging market. African Journal of Economic and Management Studies, 7(4), 462–481. https://doi.org/10.1108/AJEMS-07-2015-0088
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012–1027. https://doi.org/10.1016/j.jbankfin.2011.10.012
Lubis, R., Khairun Nasirin, W., & Nasution, A. A. (2023). Nexus Between Foreign Direct Investment, Islamic Financial Performance and Economic Growth with Economic Freedom as Moderating Variable. International Journal of Islamic Business and Economics (IJIBEC), 7(1), 49–63. https://doi.org/10.28918/ijibec.v7i1.6920
Naili, M., & Lahrichi, Y. (2022). Banks’ credit risk, systematic determinants and specific factors: Recent evidence from emerging markets. Heliyon, 8(2), e08960. https://doi.org/10.1016/j.heliyon.2022.e08960
Nasirin, W. K. N. (2020). Forecasting Market Share Perbankan Syariah di Indonesia [Skripsi, Institut Agama Islam Negeri Padangsidimpuan]. http://etd.iain-padangsidimpuan.ac.id/6234/
Nguyen, V. C. (2020). Government Ability, Bank-Specific Factors and Profitability: An Insight from Banking Sector of Vietnam. Journal of Advanced Research in Dynamical and Control Systems, 24(4), 415–424. https://doi.org/10.5373/jardcs/v12i4/20201455
Ozili, P., & Ndah, H. (2022). Impact of financial development on bank profitability. Journal of Economic and Administrative Sciences, ahead-of-print. https://doi.org/10.1108/JEAS-07-2021-0140
Pessarossi, P., Thevenon, J.-L., & Weill, L. (2020). Does high profitability improve stability for European banks? Research in International Business and Finance, 53, 101220. https://doi.org/10.1016/j.ribaf.2020.101220
Sari, A. F. A., Fauzi, A., & Respati, D. K. (2022). The Influence of Non Performing Financing, Operational Efficiency Ratio, and Company Size on Profitability of Islamic Rural Banks in Indonesia. Jurnal Ilmiah Econosains, 20(2), Article 2. https://doi.org/10.21009/econosains.0202.01
Wanri, M., Novianty, I., & Burhany, D. (2020, Januari 1). The Effect of Economic Condition and Banking Policy on Non-Performing Financing and Profitability: Evidence from Islamic Rural Banks in Indonesia. https://doi.org/10.2991/aer.k.201221.090
License
Copyright (c) 2024 Ismul Fakhri Lubis, Dede Ruslan, Muhammad Fitri Rahmadana
This work is licensed under a Creative Commons Attribution 4.0 International License.
Downloads
How to Cite
