Estimating Profitability of Islamic Banking in Indonesia

Agus Widarjono

Abstract


The Islamic banking industry in Indonesia had experienced rapid growth since the government passed the Islamic banking law in 2008. Although growing fast but the market share of Islamic banking was still low. To increase the market share of Islamic banking, it was necessary to encourage Islamic banking performance. One of the performances of Islamic banking investigated in this study was profitability. We examined the profitability of Islamic banking using both internal and external factors. The method used to estimate the profitability of Islamic banking was the Autoregressive Distributed Lag Model (ARDL) method with monthly data. The estimation results showed that both internal and external factors affect the profit of Islamic banking. Asset, FDR, efficiency, and NPL affect profitability. An important variable affecting profitability were the bad financing (NPF). While the external factor influencing the profit of Islamic banking was the exchange rate and inflation. The implication of this result was that Islamic banking must be able to manage well the bad financing. Since NPF also depends on macroeconomic conditions, the government must be able to manage macroeconomic performance well such as stabilizing the exchange rate.

JEL Classification: G21, G24

DOI: https://doi.org/10.26905/jkdp.v22i3.2197


Keywords


Autoregressive Distributed Lag Model; External Factor; Internal Factor; Islamic Banking; Profitability

Full Text:

PDF

References


Aisyah, S., & Hosen, M. N. (2018). Total factor productivity and efficiency analysis on Islamic bank in Indonesia. Jurnal Keuangan dan Perbankan, 22(1), 137–147. https://doi.org/10.26905/jkdp.v22i1.1333

Akhtar, M., Ali, K., & Sadaqat, S. (2011). Factors influencing the profitability of Islamic banks of Pakistan. International Research Journal of Finance and Economics, 66, 1–8.

Alharbi, A. T. (2017). Determinants of Islamic banks’ profitability: International evidence. International Journal of Islamic and Middle Eastern Finance and Management, 10(3), 331–350. https://doi.org/10.1108/IMEFM-12-2015-0161

Aliyu, S., & Yusof, R. M. (2016). Profitability and cost efficiency of Islamic banks: A panel analysis of some selected countries. International Journal of Economics and Financial Issues, 6(4), 1736–1743. Retrieved from: http://www.econjournals.com/index.php/ijefi/article/view/2799

Bashir, A. H. M. (2003). Determinants of profitability in Islamic banks: Some evidence from the Middle East. Islamic Economic Studies, 11(1), 32–57. Retrieved from: https://ideas.repec.org/a/ris/isecst/0073.html

Choong, Y. V., Thim, C. K., & Kyzy, B. T. (2012). Performance of Islamic commercial banks in Malaysia: An empirical study. Journal of Islamic Economics, Banking, and Finance, 8(2), 67–80. Retrieved from: http://ibtra.com/pdf/journal/v8_n2_article3.pdf

Hosen, M. N., & Rahmawati, R. (2016). Efficiency and profitability on Indonesian Islamic banking industry. Al-Iqtishad: Journal of Islamic Economics, 8(1), 33–48. https://doi.org/10.15408/aiq.v8i1.2507

Karim, B. K., Sami, B. A. M., & Hichem, B. K. (2010). Bank-specific, industry-specific, and macroeconomic determinants of African Islamic banks’ profitability. International Journal of Business and Management Science, 3(1), 39–56.

Khan, M. M. S., Ijaz, F., & Aslam, E. (2014). Determinants of profitability of Islamic banking industry: An evidence from Pakistan. Business & Economic Review, 6(2), 27–46.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616

Rahman, M. M., & Akhter, S. (2015). Bank-specific factors influencing profitability of Islamic Banks in Bangladesh. Journal of Business and Technology (Dhaka), 10(1), 16. http://dx.doi.org/10.3329/jbt.v10i1.26904

Ramadan, I. Z. (2011). Bank-specific determinants of Islamic Banks profitability: An empirical study of the Jordanian Market. International Journal of Academic Research, 3(6), 73–81.

Setyawati, I., Suroso, S., Suryanto T., & Nurjannah, S. D. (2017). Does financial performance of Islamic Banking is better? Panel data estimation. European Studies Research Journal, 20(2), 592–606. Retrieved from: https://ideas.repec.org/a/ers/journl/vxxy2017i2ap592-606.html

Siddique, M. A., Khaleequzzaman, M., & Atiq-ur-Rehman. (2012). Determinants of Islamic banking industry’s profitability in Pakistan for the period 2004-2012. Journal of Islamic Business and Management, 6(1), 41–61. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2851064

Sriyana, J. (2015). Islamic banks’ profitability amid the competitive financing in Indonesia. International Journal of Applied Business and Economic Research, 13(4), 1695–1710.

Warninda, T. D. (2014). Islamic rural bank profitability: Evidence from Indonesia. Journal of Islamic Economics, Banking and Finance, 10(3), 109–122.

Wasiuzzaman, S., & Tarmizi, H. A. A. (2009). Profitability of Islamic banks in Malaysia: An empirical analysis. Journal of Islamic Economics, Banking, and Finance, 6(4), 53–68.




DOI: https://doi.org/10.26905/jkdp.v22i3.2197

Refbacks

  • There are currently no refbacks.




Jurnal Keuangan dan Perbankan (Journal of Finance and Banking)

Diploma Program of Banking and Finance, Faculty of Economics and Business, University of Merdeka Malang

Published by University of Merdeka Malang

Mailing Address:
2nd floor Finance and Banking Building, Jl. Terusan Raya Dieng No. 57 Malang, East Java, Indonesia
Phone: -
Email: [email protected]

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