Covid-19 and the Performance of Islamic Banks in Indonesia

Abstract

Covid-19 has an impact on the profitability of Islamic Banks in Indonesia. Islamic banks' profitability in Indonesia tends to decline during a covid-19 outbreak. Although declining, the profitability indicators measured by Return on Asset and Net Operating Margin are more stable than Return on Equity. The average Return on Equity declined sharply in the fourth quarter of 2021. This study aims to analyze the determinants of the profitability of Islamic banks, including internal bank factors and macroeconomic indicators during the covid-19 outbreak. This study uses a quantitative approach with the fixed effect method. This study employs panel data from 8 Islamic commercial banks from 2020q1 to 2021q4. The results show that capital adequacy, disbursed financing, and operational efficiency has a negative and significant effect on the profitability of Islamic banks. Financing risk and bank size have no significant effect on the profitability of Islamic banks. Macroeconomic indicators such as economic growth, inflation, interest rates, and exchange rates have no significant effect on the profitability of Islamic banks. During the covid-19 pandemic, to increase profitability, banks need to reduce the capital and financing provided to customers. On the other hand, to increase profitability, Islamic banks need to reduce unnecessary costs so that income is not eroded. Macroeconomic indicators do not influence the performance of Islamic banks. This shows that Islamic commercial banks are more resistant to economic turbulence.

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