Article Sidebar

Determinants of profitability in Indonesian Islamic banks: Financial and macroeconomic insights
Submitted
September 1, 2023
Accepted
November 30, 2023
Published
December 31, 2023
Download
PDF Review Reports Originality Report
Statistic
Read Counter : 195 Download : 131

Main Article Content

Abstract

Introduction
Profitability is a crucial indicator of financial sustainability and competitiveness in the banking industry. For Islamic banks, profitability is influenced by both internal financial management and external macroeconomic factors, shaped by their adherence to Sharia principles. Indonesian Islamic banks operate in a dynamic financial environment that presents unique challenges and opportunities for sustaining profitability.
Objectives
This study examines the determinants of profitability in Indonesian Islamic banks, focusing on the effects of internal financial ratios—Financing to Deposit Ratio (FDR), Capital Adequacy Ratio (CAR), Non-Performing Financing (NPF), and operating efficiency (BOPO)—as well as external factors such as interest rates and inflation.
Method
A quantitative approach was employed, analyzing secondary data from 12 Islamic banks in Indonesia over the 2014–2018 period. Multiple regression analysis was used to evaluate the relationships between these variables and profitability, measured by Return on Assets (ROA). Diagnostic tests ensured the robustness and validity of the statistical model.
Results
The findings reveal that FDR positively influences profitability, while NPF and BOPO have significant negative effects. CAR and inflation show no significant impact, and interest rates indirectly affect profitability despite the interest-free nature of Islamic banking. These results highlight the interplay of internal management practices and macroeconomic factors in shaping financial performance.
Implications
This study emphasizes the need for Islamic banks to enhance credit risk management, optimize operational efficiency, and adapt to macroeconomic conditions to sustain profitability. The findings provide actionable insights for policymakers, regulators, and practitioners aiming to strengthen the financial sustainability of Islamic banking in Indonesia.
Originality/Novelty
This research integrates internal and macroeconomic determinants to offer a comprehensive analysis of profitability in Indonesian Islamic banks. By bridging gaps in the literature, it contributes to the development of strategies for financial performance optimization in Sharia-compliant banking.

Keywords

credit risk management financial performance Islamic banking profitability macroeconomic factors operational efficiency

Article Details

License

Copyright (c) 2023 Khilyatun Nisa', Yuli Andriansyah, Barham Bakr Hasan

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
  3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
How to Cite
Nisa’, K. ., Andriansyah, Y., & Hasan, B. B. . (2023). Determinants of profitability in Indonesian Islamic banks: Financial and macroeconomic insights. Journal of Islamic Economics Lariba, 9(2), 567–590. https://doi.org/10.20885/jielariba.vol9.iss2.art14
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX
Crossref
Scopus
Google Scholar
Europe PMC

References

  1. Ajizah, S. D. N., & Widarjono, A. (2022). Dampak COVID-19 terhadap keuntungan bank umum syariah (BUS) di Indonesia [The impact of COVID-19 on the profits of Islamic commercial banks (BUS) in Indonesia]. Jurnal Kebijakan Ekonomi Dan Keuangan, 1(2), 145–152. https://doi.org/10.20885/JKEK.vol1.iss2.art1

  2. Alhammadi, S., Alotaibi, K. O., & Hakam, D. F. (2022). Analysing Islamic banking ethical performance from Maqāṣid al-Sharī‘ah perspective: Evidence from Indonesia. Journal of Sustainable Finance & Investment, 12(4), 1171–1193. https://doi.org/10.1080/20430795.2020.1848179

  3. Ali, M. A., Shuib, M. S., & Nor, A. M. (2021). Protection of bank’s wealth: How is Islamic banks’s financial performance affected by asset quality and operational efficiency. Universal Journal of Accounting and Finance, 9(4), 745–756. https://doi.org/10.13189/ujaf.2021.090420

  4. Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001

  5. Bashir, A., & Hassan, A. (2017). Interrelationship among Basel capital regulation, risk, and efficiency in Pakistani commercial banks. Business & Economic Review, 9(2), 165–186. https://doi.org/10.22547/BER/9.2.7

  6. Bashir, A.-H. M. (2003). Determinants of profitability in Islamic banks: Some evidence from the Middle East. Islamic Economic Studies, 11(1), 31–57. http://iesjournal.org/english/Docs/103.pdf

  7. Berniz, Y. M., Najmudin, N., Jayanti, E., Rahmawati, I. Y., & Utami, Y. (2023). The influence of third-party funds; asset quality, profit, and lost sharing to the Islamic bank liquidity in Indonesia. International Journal of Science, Technology & Management, 4(4), 1023–1033. https://doi.org/10.46729/ijstm.v4i4.876

  8. Chong, B. S., & Liu, M.-H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003

  9. Darma, E. S., & Afandi, A. (2021). The role of Islamic corporate governance and risk toward Islamic banking performance: Evidence from Indonesia. Journal of Accounting and Investment, 22(3), 517–538. https://doi.org/10.18196/jai.v22i3.12339

  10. Gharbi, L., & Khamoussi, H. (2016). Fair value and banking contagion: Empirical evidence from Islamic and conventional banking sectors in GCC region. Journal of Islamic Accounting and Business Research, 7(3), 215–236. https://doi.org/10.1108/JIABR-12-2014-0042

  11. Halim, S., & Buana, M. T. L. (2021). The influence of non-performed financing (NPF), operational costs, financing to deposit ratio (FDR) and net operating margin to return on assets at Indonesian Sharia commercial banks. Falah: Jurnal Ekonomi Syariah, 6(2), 44–59. https://doi.org/10.22219/jes.v6i1.16179

  12. Hasibuan, A. A., Zulpahmi, Z., Wahyudin, N., & Nurlaila, A. (2022). The effect of financing to deposit ratio (FDR), non-performing financing (NPF), capital adequacy ratio (CAR), operating expenses and operating income (BOPO) on ROA in Islamic commercial bank. AL-FALAH : Journal of Islamic Economics, 7(2), 289–308. https://doi.org/10.29240/alfalah.v7i2.5395

  13. Hasyim, F., Pratiwi, N., Asmaradhan, N. S., & Kurniyadi, K. (2023). The effect of exchange rates, inflation and BI Rates on profitability in Islamic commercial banks during the 2016-2022 period. Asy Syar’iyyah: Jurnal Ilmu Syari’ah Dan Perbankan Islam, 8(2), 162–184. https://doi.org/10.32923/asy.v8i2.3040

  14. Hidayat, N. W., Wardini, A. K., & Wati, L. N. (2021). Determining the performance of Sharia commercial banks with moderation of non performing financing ratio in Indonesia. Riset, 3(2), 563–580. https://doi.org/10.37641/riset.v3i2.92

  15. Hosen, M. N., & Rahmawati, R. (2016). Efficiency and profitability in the Indonesian Islamic banking industry. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 8(1), 33–48. https://doi.org/10.15408/aiq.v8i1.2507

  16. ’Izza, A. H., & Utomo, B. (2022). Pengaruh capital adequacy ratio (car) dan financing to deposito ratio (FDR) terhadap profitabilitas dengan non performing financing (NPF) sebagai variabel intervening pada bank umum syariah [The effect of capital adequacy ratio (car) and financing to deposit ratio (FDR) on profitability with non-performing financing (NPF) as intervening variable in Islamic commercial banks]. Jurnal Revenue : Jurnal Ilmiah Akuntansi, 2(2), 289–301. https://doi.org/10.46306/rev.v2i2.73

  17. Katili, C. Y., & Kadir, R. D. (2023). Long term impact profitability of market share Islamic bank in Indonesia. Al-Amwal : Jurnal Ekonomi Dan Perbankan Syari’ah, 15(1), 112–122. https://doi.org/10.24235/amwal.v15i1.13316

  18. Khalidin, B., & Masbar, R. (2017). Interest rate and financing of Islamic banks in Indonesia (A vector auto regression approach). International Journal of Economics and Finance, 9(7), 154–164. https://doi.org/10.5539/ijef.v9n7p154

  19. Liu, H., & Wilson, J. O. S. (2010). The profitability of banks in Japan. Applied Financial Economics, 20(24), 1851–1866. https://doi.org/10.1080/09603107.2010.526577

  20. Malek, M. A., & Rao, G. V. (2022). Profitability of Islamic banking – A study of select Islamic banks from Asia. International Journal of Islamic Economics and Finance Studies, 8(1), 57–77. https://doi.org/10.54427/ijisef.1027563

  21. Maulidar, A., & Majid, M. S. Abd. (2020). Do good corporate governance and financing risk management matter for Islamic banks’ performance in Indonesia? Etikonomi, 19(2), 169–184. https://doi.org/10.15408/etk.v19i2.15080

  22. Megeid, N. S. A. (2017). Liquidity risk management: Conventional versus Islamic banking system in Egypt. Journal of Islamic Accounting and Business Research, 8(1), 100–128. https://doi.org/10.1108/JIABR-05-2014-0018

  23. Muhammad, R., & Triharyono, C. (2019). Analysis of islamic banking financial performance before, during and after global financial crisis. Jurnal Ekonomi & Keuangan Islam, 5(2), 80–86. https://doi.org/10.20885/jeki.vol5.iss2.art5

  24. Mukhibad, H., & Anisykurlillah, I. (2020). Evaluation study: Does the sharia supervisory board have a direct effect on profitability? Muqtasid: Jurnal Ekonomi Dan Perbankan Syariah, 11(1), 55–69. https://doi.org/10.18326/muqtasid.v11i1.55-69

  25. Mukhibad, H., & Khafid, M. (2018). Financial performance determinant of Islamic banking in Indonesia. Jurnal Keuangan Dan Perbankan, 22(3), 506–517. https://doi.org/10.26905/jkdp.v22i3.2061

  26. Nurkhin, A., Kusmuriyanto, Widiyanto, W., Kania Widiatami, A., & Nur Aeni, I. (2023). Do corporate governance implementation and bank characteristics improve the performance of Indonesian Islamic banking? Before-COVID-19 pandemic analysis. Banks and Bank Systems, 18(3), 126–135. https://doi.org/10.21511/bbs.18(3).2023.11

  27. Nursyamsiah, T. (2018). Macroeconomic determinants of Islamic banking financing. Tazkia Islamic Finance and Business Review, 11(2), 145–164. https://doi.org/10.30993/tifbr.v11i2.136

  28. Putri, P., Fakhruddin, I., Santos, S. B., & Inayati, N. I. (2023). The effect of sharia supervisiory board size and the health ratio of bank Sharia to profitability. Indonesian Journal of Business Analytics, 3(3), 681–700. https://doi.org/10.55927/ijba.v3i3.2426

  29. Rizal, F. (2022). Analysis of the robustness of Islamic commercial banks in Indonesia during the COVID-19 pandemic. Journal of Islamic Economics and Finance Studies, 3(1), 12–23. https://doi.org/10.47700/jiefes.v3i1.4251

  30. Rizal, R., Marlion, F. A., Pasrizal, H., & Anita, R. (2021). Internal and external factors effects towards return on assets in Indonesian foreign exchange Sharia bank. Muqtasid: Jurnal Ekonomi Dan Perbankan Syariah, 12(1), 49–62. https://doi.org/10.18326/muqtasid.v12i1.49-62

  31. Rustam, A., & Adil, M. (2022). Financial sustainability ratio and aspects that affect it. Jurnal Akuntansi, 26(1), 144–160. https://doi.org/10.24912/ja.v26i1.822

  32. Samad, A., & Hassan, M. K. (1999). The performance of Malaysian Islamic bank during 1984–1997: An exploratory study. International Journal of Islamic Financial Services, 1(3), Article 1. https://www.iiibf.org/journals/journal3/art1.pdf

  33. Sari, E. Y., & Riyadi, S. (2022). The determinant effect of financial performance on return on assets (ROA) in full-fledged Islamic banks in Indonesia for the 2015-2019 period. International Journal of Management and Economics Invention, 8(7), 2507–2514. https://doi.org/10.47191/ijmei/v8i7.03

  34. Sharma, R. (2023). Beyond profit: Understanding the foundations and future of Islamic banking. Journal for ReAttach Therapy and Developmental Diversities, 6(9s), Article 9s. https://doi.org/10.53555/jrtdd.v6i9s.2325

  35. Sholikhin, M. Y., Supriani, I., & Amijaya, R. N. F. (2021). Examining the correlation between Islamic banks profitability and the business cycle in Indonesia. International Journal of Islamic Business Ethics, 6(1), 37–53. https://doi.org/10.30659/ijibe.6.1.37-53

  36. Sjarief, L., Ghoni, M. A., & Affandi, M. T. (2023). The role of financial performance on the profitability of Indonesian Islamic banks. Jurnal Ekonomi & Keuangan Islam, 9(2), 277–285. https://doi.org/10.20885/JEKI.vol9.iss2.art9

  37. Sopingi, I., Tjiptohadi Sawarjuwono, Imron Mawardi, & Kusnul Ciptanila Yuni K. (2023). The influence of internal and external factors on the profitability of Islamic commercial banks in Indonesia. Jurnal RAK (Riset Akuntansi Keuangan), 8(2), 194–207. https://doi.org/10.31002/rak.v8i2.1136

  38. Srairi, S. A. (2010). Cost and profit efficiency of conventional and Islamic banks in GCC countries. Journal of Productivity Analysis, 34(1), 45–62. https://doi.org/10.1007/s11123-009-0161-7

  39. Sudarsono, H., & Shiddiqi, J. S. A. (2022). Equity financing, debt financing, and financial performance in Islamic banks. Muqtasid: Jurnal Ekonomi Dan Perbankan Syariah, 12(2), 89–104. https://doi.org/10.18326/muqtasid.v12i2.89-104

  40. Suryadi, A. A., Rinofah, R., & Sari, P. P. (2022). Analisis CAR, NPL, BOPO dan LDR terhadap profitabilitas [Analysis of CAR, NPL, BOPO and LDR on profitability]. Al-Kharaj : Jurnal Ekonomi, Keuangan & Bisnis Syariah, 4(4), 1032–1049. https://doi.org/10.47467/alkharaj.v4i4.775

  41. Tok, E., & Yesuf, A. J. (2022). Embedding value-based principles in the culture of Islamic banks to enhance their sustainability, resilience, and social impact. Sustainability, 14(2), 916. https://doi.org/10.3390/su14020916

  42. Uyemura, D. G., Kantor, C. C., & Pettit, J. M. (1996). Eva® for banks: Value creation, risk management, and profitability measurement. Journal of Applied Corporate Finance, 9(2), 94–109. https://doi.org/10.1111/j.1745-6622.1996.tb00118.x

  43. Wasiuzzaman, S., & Tarmizi, H. (2010). Profitability of Islamic banks in Malaysia: An empirical analysis. Journal of Islamic Economics, Banking and Finance, 6(4), 53–68. https://ibtra.com/pdf/journal/v6_n4_article3.pdf

  44. Widarjono, A. (2020). Does the volatility of macroeconomic variables depress the profitability of Islamic banking? JEJAK, 13(1), 30–42. https://doi.org/10.15294/jejak.v13i1.19460

  45. Widarjono, A., & Misanam, M. (2023). Bank stability, Covid-19, and Islamic bank financing in Indonesia. Jurnal Ilmiah Ekonomi Islam, 9(2), 2899–2906. https://doi.org/10.29040/jiei.v9i2.8131

  46. Widarjono, A., Salandra, A., Susantun, I., & Ruchba, S. M. (2022). Determinant of Indonesian Islam bank’s profitability: Lessons from the BRI Syariah case. Jurnal Ilmiah Ekonomi Islam, 8(3), 3127–3135. https://doi.org/10.29040/jiei.v8i3.6542

  47. Windriya, A., Mashudi, M., Fauziah, L., Lorenza, S. M., & Rahmawati, I. (2023). Macroeconomic sensitivity and financial performance on Islamic banks profitability. Jurnal Ilmiah Ekonomi Islam, 9(2), 2620–2631. https://doi.org/10.29040/jiei.v9i2.8974

  48. Yastika, R. D. R., Rita, M. R., & Sakti, I. M. (2020). The moderating role of capital adequacy in the effect of liquidity on the profitability of Islamic banking. Relevance: Journal of Management and Business, 3(2), 115–125. https://doi.org/10.22515/relevance.v3i2.2849

Most read articles by the same author(s)