The Determinants of Islamic Banks’ Non-Performing Financing in the Small-Medium Enterprises (SMEs) Sector
Main Article Content
Abstract
The performance of Islamic banks in financing activities is determined by many factors, including macroeconomic variables and internal factors, such as the financial performance of the bank. The study investigates the determinant of non-performing financing (NPF) of Islamic banks in Indonesia, particularly in Small-Medium Enterprises (SMEs) sector. Adopting the panel data analysis, the data comprise 33 provinces in Indonesia starting from 2016m1 to 2021m07, equal to a 2211 observation period. The study reveals that the size of the bank’s asset and financing to deposit ratio (FDR) of Islamic banks has a significant relationship to NPF value in SMEs sector, and the impact remains unchanged in the period before and during the COVID-19 pandemic. From the regional viewpoint, the size of the bank’s assets also has a significant influence on NPF in the provinces located in Java but not outside of Java. As a policy implication, the study suggests that the size of a bank’s assets must be enhanced with prudent risk management in financing activities in the SME sector. Surely, the policy can be implemented in a top-down approach through government and financial authority; then it also can be applied bottom-up approach through the bank’s business activities. Finally, as the limitation of the research, the study only utilizes limited variables and uses a single-country analysis which can be improved and extended for future study.
Article Details
License
You are free to:
- Share — copy and redistribute the material in any medium or format
- Adapt — remix, transform, and build upon the material for any purpose, even commercially.
The licensor cannot revoke these freedoms as long as you follow the license terms.
Under the following terms:
- Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
- ShareAlike — If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original.
- No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.
Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
References
Abid, L., Ouertani, M. N., & Zouari-Ghorbel, S. (2014). Macroeconomic and Bank-specific Determinants of Household’s Non-performing Loans in Tunisia: A Dynamic Panel Data. Procedia Economics and Finance, 13, 58-68. https://doi.org/10.1016/s2212-5671(14)00430-4
Anto, M. H., Fakhrunnas, F., & Tumewang, Y. K. (2022). Islamic banks credit risk performance for home financing: Before and during Covid-19 pandemic. Economic Journal of Emerging Markets, 14(1), 113–125. https://doi.org/10.20885/ejem.vol14.iss1.art9
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277-297. https://doi.org/10.2307/2297968
Asmy, M., Mohd, B., Thaker, T., Bin, H., Thas, M., Bin, A., Pitchay, A., Amin, F. Bin, & Khaliq, A. Bin. (2020). Leveraging Islamic Banking and Finance for Small Business: Exploring the Conceptual and Practical Dimension. In ADBI Working Paper (Issue 1156).
Aviliani, A., Siregar, H., Maulana, T., & Hasanah, H. (2015). The Impact of Macroeconomic Condition on The Banks Performance in Indonesia. Buletin Ekonomi Moneter Dan Perbankan, 17(4), 379-402. https://doi.org/10.21098/bemp.v17i4.503
Aysan, A. F., Disli, M., Ng, A., & Ozturk, H. (2016). Is small the new big? Islamic banking for SMEs in Turkey. Economic Modelling, 54, 187–194. https://doi.org/10.1016/j.econmod.2015.12.031
Bernanke, B., Gertler, M., & Gilchrist, S. (1998). Financial Accelarator in A Quantitative Business Cycle Framework (NBER Working Paper No.6455).
Boyd, J. H., & Runkle, D. E. (1993). Size and performance of banking firms. Journal of Monetary Economics, 31(1), 47–67. https://doi.org/10.1016/0304-3932(93)90016-9
Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
Erdinç, D., & Gurov, A. (2016). The Effect of Regulatory and Risk Management Advancement on Non-Performing Loans in European Banking, 2000–2011. International Advances in Economic Research, 22(3), 249–262. https://doi.org/10.1007/s11294-016-9591-y
Fakhrunnas, F. (2020). Total Financing of Islamic Rural Banks and Regional Macroeconomic Factors: A Dynamic Panel Approach. Jurnal Ekonomi & Studi Pembangunan, 21(1), 1-15. https://doi.org/10.18196/jesp.21.1.5028
Fakhrunnas, F., Karina Tumewang, Y., & B. Hendrie Anto, M. (2021). The impact of inflation on Islamic banks’ home financing risk: Before and during the COVID-19 outbreak. Banks and Bank Systems, 16(2), 78–90. https://doi.org/10.21511/bbs.16(2).2021.08
Firmansyah, E. A., & Gunardi, A. (2018). A New Paradigm in Islamic Housing: Non-Bank Islamic Mortgage. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 10(2), 313-324. https://doi.org/10.15408/aiq.v10i2.7274
Haberler, G. (1974). Inflation as a worldwide phenomenon an overview. Review of World Economics, 110(2), 179–193. https://doi.org/10.1007/bf02696943
Holtz-Eakin, D., Newey, W., & Rosen, H. S. (1988). Estimating Vector Autoregressions with Panel Data. Econometrica, 56(6), 1371–1395. https://doi.org/10.2307/1913103
Ibrahim, A., & Rahmati, A. (2017). Analisis Solutif Penyelesaian Pembiayaan Bermasalah di Bank Syariah: Kajian Pada Produk Murabahah di Bank Muamalat Indonesia Banda Aceh. Iqtishadia - Jurnal Kajian Ekonomi dan Bisnis Islam, 10(1), 71-96. Retrieved from https://journal.iainkudus.ac.id/index.php/IQTISHADIA/article/view/2319
Ibrahim, M. H., & Rizvi, S. A. R. (2017). Do we need bigger Islamic banks? An assessment of bank stability. Journal of Multinational Financial Management, 40, 77–91. https://doi.org/10.1016/j.mulfin.2017.05.002
Khattak, M., Ali, M., Hamid, B., & Islam, M. (2021). Competition, Diversification, and Stability in The Indonesian Banking System. Buletin Ekonomi Moneter dan Perbankan, 24, 59-88. https://doi.org/10.21098/bemp.v24i0.1481
Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy, 105(2), 211–248. https://doi.org/10.1086/262072
Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. IMF Working Papers, 13(72), 1-27. https://doi.org/10.5089/9781484318522.001
Lin, H.-Y., Farhani, N. H., & Koo, M. (2016). The Impact of Macroeconomic Factors on Credit Risk in Conventional Banks and Islamic Banks: Evidence from Indonesia. International Journal of Financial Research, 7(4), 105-116. https://doi.org/10.5430/ijfr.v7n4p105
Nursechafia, & Abduh, M. (2014). The Susceptibility of Islamic Banks’ Credit Risk Towards Macroeconomic Variables. Journal of Islamic Finance, 3(1), 23–37. https://doi.org/10.12816/0031476
Priyadi, U., Utami, K. D. S., Muhammad, R., & Nugraheni, P. (2021). Determinants of credit risk of Indonesian Sharīʿah rural banks. ISRA International Journal of Islamic Finance, 13(3), 284–301. https://doi.org/10.1108/ijif-09-2019-0134
Raza, H., Ahmed, F., Osama, A., & Ahmed, F. (2017). Islamic banking for small and medium enterprises (SMEs): A glance at challenges and prospects in Pakistan. International Journal of Development and Sustainability, 6(12), 1998–2008.
Sutrisno, S., Panuntun, B., & Adristi, F. I. (2020). The Effect of Covid-19 Pandemic on the Performance of Islamic Bank in Indonesia. EQUITY, 23(2), 125–136. https://doi.org/10.34209/equ.v23i2.2245
Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks. Borsa Istanbul Review, 18(4), 349–358. https://doi.org/10.1016/j.bir.2018.07.006
Widarjono, A., Anto, M. B. H., & Fakhrunnas, F. (2020). Financing Risk in Indonesian Islamic Rural Banks: Do Financing Products Matter? The Journal of Asian Finance, Economics and Business, 7(9), 305–314. https://doi.org/10.13106/jafeb.2020.vol7.no9.305