Do stability and size affect the profitability of Islamic rural bank in Indonesia?

Abstract

Purpose -This study aims to analyze the effect of stability, size, financial performance and macroeconomic variables on the profitability of Islamic Rural Banks (BPRS) in Indonesia.Methodology -This study uses panel data consisting of 82 BPRS from December 2012 to December 2018. This study uses a dynamic model using GMM (General Method of Moments) developed by Arellano & Bover (1995) and Blundell & Bond (1998). GMM is used to describe the actual conditions in the analysis of profitability of Islamic Rural Banks.Findings -The findings of this study indicate that the stability and size of the BPRS have a negative effect on the level of ROA and ROE. Further, BAC has a positive effect on ROA but it has a negative effect on ROE. While the deposit structure (DS) is found to have a positive effect on ROA and ROE, FDR and the total deposit (DAR) is found to have a positive effect on both ROA and ROE. Meanwhile, the capital structure does not show a significant value on ROA. On the other hand, economic growth (GDP) and inflation (INF) do not show a significant relationship to ROA, but inflation is positively related to ROE.Originality -This study is to determine the effect of the stability and the size of BPRS on its profitability. This study uses 6 models to obtain a consistent variation of variables in influencing profitability.

Islamic Banking Profitability in Indonesia

“…The higher the financing provided by the bank has the opportunity to increase profits because the main income for IRBs comes from financing. Al-Harbi (2019) and Sudarsono et al, (2021) in their research found a positive and significant effect between FDR and profitability. While Purwasih & Wibowo (2021) actually found a negative effect, while Irwan (2017) found that there was no effect between FDR and profitability.…”

“…The novelty of this study is to examine the financing scheme that contributes to profitability between profit margin financing (PMF) and profit-sharing financing (PSF), which has not been widely studied. Only Kuswara, Puji Lestari, & Retnaningsih (2019) examined the effect of mudharabah financing, musyarakah financing and mudharabah financing on ROA, while most researchers used financial ratio variables such as FDR, NPF, CAR, OEIR as variables affecting profitability (Sudarsono et al, 2021;Jaouad & Lahsen, 2018;Widarjono &Anto, 2020 andSaid &Ali, 2016). The results of this study are very meaningful for the management of Islamic banks in making decisions on financing schemes which so far have been dominated by low-risk PMFs compared to high-risk PSFs.…”

“…Table 1 shows that the average PMF is 80.84% while the PSF is only 19.16% (OJK, 2021). Meanwhile, according to Sudarsono, Afriadi, & Suciningtias (2021), financing that is very compatible with sharia is profit sharing financing. The novelty of this research is to analyze which financing scheme contributes to the profitability.…”

Analisis Likuiditas Bank Umum Syariah di Indonesia

“…ROA merupakan rasio yang mengindikasikan kesuksesan bank syariah dalam menghimpun laba (Mujaddid & Wulandari, 2017). ROA merupakan indikator kinerja bank untuk menghasilkan laba sebelum pajak dari total rata-rata aset yang dimiliki (Sudarsono, et al, 2021;Pertiwi et al, 2020). Adapun semakin besar ROA maka akan berbanding lurus dengan keuntungan yang didapatkan (Santoso dan Sukihanjani (2013).…”

Financing Scheme and Determinant Factors

“…Liquidity risk, as measured by the financing to deposit ratio (FDR), shows the amount of financing provided compared to public deposits, so the larger the FDR, the greater the financing provided [5]. IRBs are very interested in FDR because they can contribute profits to banks [6,7]. The higher the FDR, the higher the financing.…”