The role of financial performance on the profitability of Indonesian Islamic banks

Abstract

Purpose – The aim of this study is to analyse the effect of non performing financing (NPF), capital adequacy ratio (CAR), financing to deposit ratio (FDR), and Bank Indonesia Sharia certificate (SBIS) on Islamic Banks’ profitability (ROA) in Indonesia. Methodology – The data set consist of 10 Islamic banks operating in Indonesia between 2017—2021. The secondary data collected from the Financial Services Authority (OJK). A method of panel data is used for this study by using Stata 17 to processed the data Findings – The estimation results showed that NPF partially has a significant negative relationship on ROA, both CAR and SBIS have significant effect on ROA, while FDR has no effect on ROA. Simultaneously, NPF, CAR, and FDR have no effect on ROA. But NPF, CAR, FDR, and SBIS simultaneously have positive and significant effect on Islamic Bank’ profitability (ROA) by the year of 2017 – 2021. Implication – Islamic banks need to be more selective in providing financing to customers so that financing risks can be minimized. In addition, CAR and SBIS need to be increased or maintained so that the profitability level of Islamic banks can be maximized Originality – This research tries to re-examine the effect of financial performance on the profitability of Islamic banks in 2017-2021