Determinants of Islamic Rural Bank Financing in Indonesia

Abstract

This research is designed to empirically investigate the determinants of Islamic rural banking financing in Indonesia after 2008 global financial crisis covering period 2009.1-2014.12. The methods applied in this research are Error Correction Model (ECM) and VAR/VECM. The results of ECM model demonstrate that the variable third party funds (DPK) and non-performing financing can significantly affect Islamic rural banking financing both in the short run and long run, while Return on Asset (ROA) and Profit-and-loss sharing does not have a significant influence. Islamic rural bank financing, however, was influenced by inflation and exchange rate as the proxy of macroeconomic variables in the short and long run. Furthermore, Impulse Response Function (IRF) and variance decomposition results show that Profit-and-loss sharing (PLS) has the largest positive impact to financing (39.08%), followed by third party fund (19.6%) and inflation (8.9%). While, the variables that contribute to reduce financing are non-performing financing (9.02%), followed by ROA (7.76%) and exchange rate (2.48%).

Financing Scheme and Determinant Factors

“…This may be due to concerns of financing officers in disbursing funds for fear of increasing the NPF, so that public funds that should have been disbursed have been withheld. These results are supported by Apriyanti, Effendi, & Burhanuddin, [19] and Sudarsono et al [14] but are inconsistent with some previous researchers who reveal a positive effect between TPF and financing [9,10,12,16,20].…”

“…TPF is the primary fund channeled for financing, so the larger the TPF, the greater the bank's ability to provide financing [10]. Pratikno & Ratnasari [16], Widodo & Asas [12], and Hadiyati & Iqbal, [13] show a positive influence between TPF and financing. Based on the description above, the hypotheses are:…”

“…The higher the TPF indicates the public trusts the bank in saving their funds. TPF is the primary fund channeled for financing; the larger the TPF, the greater the bank's ability to provide financing [10,12,13].…”

Islamic Banking Profitability in Indonesia

“…The function of the bank is a financial intermediary between people who have excess funds (surplus units) and people who need funds (deficit units). Banks must be able to mobilize funds from the public which will later be distributed to customers who need financing (Widodo & Asas, 2017). Most banking assets come from customers, so the higher the TPF, the greater the public funds.…”