The Determinants of Bank Profitability: Empirical evidence from Indonesian Sharia Banking Sector

Abstract

This paper aims to examine the internal and external determinants of sharia banks profitability in Indonesia over the period 2010-2017. The bank profitability is measured by return on assets (ROA) as a function of bank-internal and external determinants. Using balances data set and fixed effect model, the empirical results have found strong evidence that both internal and external factors have a strong influence on the profitability. The internal factors of the bank i.e., capital adequacy, credit risk, and asset size have a significant and negatif effect on bank profitability, while liquidity have a positive and significant impact on banks profitability. However, the external factors only inflation has a significant and positive effect, while GDP has a negatif and significant effect on banks profitability. This result suggest that banks can improve their profitability through increasing banks liquidity, reinforce their capital structure, reduce their assets sizes and credit risk, in addition banks should be anticipate the external factors, thus sharia banks will be more competitive than conventional banks.

The Impact of Risk and Reputation on Financial Performance in Islamic Banking: Evidance From Indonesia

“…Therefore, the first hypothesis is supported. Our findings are consistent with the previous studies: e.g., Masrur et al (2019), andSupiyadi et al (2019). Nonperforming financing leads to loss.…”

“…On the contrary, if Islamic bank provide too little financing, Islamic bank cannot meet its function as financing provider. Our result is inconsistent with the finding fromMasrur et al (2019) andSupiyadi et al (2019) who found that liquidity risk is positively associated with the profitability. Islamic Stakeholder Theory states that Islamic bank has a responsibility to meet its liabilities.…”

“…Weak management, nonperforming loan, and insufficient capital to cover all risks can reduce the bank's performance (Supiyadi et al, 2019). Poor bank's performance increases risk, reduces profitability, and discourage society, investors, business society and government in having relationship with the bank.…”

Profitability of Islamic Banks: A Panel Data Analysis

“…This relationship reflects in the framework of the priorities of banks to protect their brand image, their reputation which leads to the valuation of their performance (Supiyadi et al, 2019). By adopting strategies and techniques, banks must offer highly qualified and distinguished services to ensure customer loyalty.…”

“…The allocation of costs or costs by increasing the volume of services or gains in terms of profitability results from a specialized workforce. In addition, giving a place for the training of the managers, this leads to increase the professional capacities and to create a good climate for the conduct of the business of the bank (Supiyadi et al, 2019). The institution's profitability therefore increases as a result of policies consistent with the quality of the workforce and a staff competence.…”