Internal Variables and Macroeconomic Factors as Determinants of Profitability in Islamic Banking Indonesia
DOI:
https://doi.org/10.57125/FEL.2023.12.25.04Keywords:
Macroeconomic, Profitability, Panel data regression, Islamic bankingAbstract
The purpose of this research was to analyse the influence of internal and macroeconomic variables on the profitability of the Islamic banking industry in Indonesia. A panel data regression approach, applying fixed effect and common effect models in order to to address potential biases in the estimation was used. The research sample consisted of five Islamic banks and covered the period from Q1 to Q4 of 2022. Chow test and Lagrange multiplier test were used to compare the analysis results. The used control variables included financing quality, financing to deposit ratio, exchange rate, and gross domestic product growth. The research was also based on economic, efficiency, and productivity theories in Islamic banking. Findings, The research results showed that the Islamic banking industry in Indonesia was increasingly compliant with prevailing regulations. The Bank Indonesia's policy interest rate (BI rate) did not significantly influence the profitability. Inflation had a negative impact on profitability, while the capital adequacy ratio showed a non-linear effect. All tested control variables exhibited an influence on profitability. Financing quality and exchange rate had negative impacts, while liquidity and economic growth had positive impacts on the profitability of the Islamic banking industry in Indonesia. The novelty of the paper is visible in the panel data regression approach that uses fixed effect and common effect models and provides an effective way to address estimation bias. Additionally, this research identified control variables that have a significant impact on profitability, including financing quality, liquidity, exchange rate, economic growth, and capital adequacy ratio to present breakthroughs and innovations.
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