Determinants of credit risk of Indonesian Sharīʿah rural banks

Abstract

Purpose This study aims to examine the influence of internal and external factors on the credit risk (represented by nonperforming financing [NPF]) of Indonesian Sharīʿah rural banks (SRBs) – a type of Islamic bank that provides Islamic financial services especially to small and medium businesses in Indonesia. Internal variables comprise capital adequacy ratio (CAR), financing to deposit ratio (FDR), return on assets (ROA), operating expense ratio (OER), financing to value (FTV) and profit and loss sharing (PLS) financing ratio. External variables comprise inflation, economic growth and interest rate. Design/methodology/approach The study uses the annual reports of SRBs in Indonesia as secondary data for the years 2010–2019. Auto regressive distributed lag (ARDL) is used as the analysis method to examine the short-run and long-run relationships between the variables. Findings The findings indicate that four variables experienced a lag in the short run, namely, NPF, inflation, CAR and PLS, with different results recorded for each of the variables. Furthermore, the long-run results show that CAR and ROA influence the NPF of SRBs positively, whereas inflation and PLS have a negative influence on NPF. The rest of the variables – notably economic growth, interest rate, FDR, FTV and OER – do not have an influence on NPF in SRBs. Research limitations/implications The level of NPF in SRBs exceeds the provision of the Central Bank of Indonesia. The findings are expected to have implications for SRBs and the regulator to consider and to manage the factors related to NPF properly due to the important role of SRBs in small and medium businesses’ development. Originality/value This study measures the determinants of NPF using internal and external variables, including the addition of a dummy variable, notably FTV. This study also uses ARDL to analyze the financial policies involving data at the present time and lagged time.

Examining the Effect of Economic Collison

“…An increase in inflation rate can cause in a decrease bank profit, so banking sector tends to reduce their financing when the inflation rate gets high. The declining in financing will lower the NPF level (Priyadi et al, 2021).…”

Risk-Based Bank Rating: Studi Multi Kasus pada Perbankan Syariah

“…Alasan kegagalan tersebut lebih pada kecukupan pengetahuan yang terbatas. Oleh karena itu, perbaikan pengetahuan dan pembangunan sistem pembiayaan perbankan syariah guna mengurangi risiko penting dilakukan (Priyadi, 2021). Pertama, NPF dapat mengukur kinerja perbankan syariah.…”

Islamic Bank Deposits during COVID-19 Pandemic: A Spatial Finance Approach

“…In addition, this approach has innovated an update in financial modelling through changing the social and cultural perceptions in individual region (Palmberg, 2012;Sellar et al, 2019). By comparison, many preliminary studies (Fakhrunnas & Imron, 2019;Muhammad et al, 2020;Priyadi et al, 2021;Wasiaturrahma et al, 2020) on the subject were basically number-oriented without involving any geographic approach in measuring the financial performance of IRBs.…”

“…The IRB had provided loans of up to 10.6 trillion rupiahs or 28.3% of the total Islamic microfinance financing to support the small and medium enterprises (Effendi et al, 2021;Financial Services Authority, 2020;Shaban et al, 2014). In addition, the growth of the Financing to Deposit Ratio (FDR) in IRB was rapid and has reached 119.72%, a significant reinforcement indeed for small and medium enterprises in Indonesia (Financial Services Authority, 2020;Muhammad et al, 2020;Priyadi et al, 2021).…”

“…Its presence has helped the public avoid financing from loan sharks who demand exorbitant interests. Furthermore, IRB has a good track record in various regions of Indonesia due its ability to penetrate varied areas to reach small entrepreneurs (Trinugroho et al ,2017;Priyadi et al, 2021). This financial institution has become a solution for customers unwilling to receive financing from conventional banks because of contradictions to Islamic Shariah Law (Trinugroho et al, 2018).…”