Analysis of the Effect of Internal and External Factors on the Efﬁciency

toward Proﬁtability of Islamic Banking Industry in Indonesia

Muhammad Asril Maulana

Post Graduate Program of Islamic Finance and Banking, Politeknik Negeri Bandung, Bandung, Indonesia

Keywords:

Bank Size, Non Performing Finance, Inﬂation, Efﬁciency, Proﬁtability, Islamic Banking Industry.

Abstract:

Getting proﬁts is the main goal of establishing a business entity, one of which is Islamic banking. One of the

ways to increase the proﬁtability of Islamic banking is efﬁciency. This study aims to examine the internal and

external factors that affect Islamic banking industry inefﬁciencies which consist of internal factors, namely

Non-Performing Finance (NPF) and bank size, as well as external factors, namely inﬂation, and the impact of

Islamic banking inefﬁciency on the proﬁtability of Islamic banking. Every bank needs to maintain a level of

bank operational efﬁciency. Islamic banking needs to know how to control it so that bank operations remain

efﬁcient with the aim of banks being able to increase proﬁts. The populations of this study are all Bank Umum

Syariah (BUS) and Unit Usaha Syariah (UUS) in Indonesia. The sample used in this study is all BUS and

UUS in Indonesia with research time limits of the period 2007-2018. The data analysis technique used is

path analysis. The results of the analysis shown that Non Performing Finance (NPF), and bank size have a

signiﬁcant impact on Islamic banking inefﬁciency, and the results of data analysis show that inﬂation does

not have a signiﬁcant impact on Islamic banking inefﬁciency, and Islamic banking industry inefﬁciency has a

negative and signiﬁcant impact on proﬁtability. The results of this study can be used as a consideration for the

Islamic banking industry management to increase efﬁciency in bank operations, because of efﬁciency can be

a positive signal to encourage increased proﬁts earned by Islamic banking industry.

1 INTRODUCTION

As a country with the largest Muslim populations in

the world, Indonesia has great potential to become

a center of development of the Islamic Finance In-

dustry (OJK, 2018a). The growth of Islamic banking

in Indonesia is indicated by the increasing number of

BUS, UUS, and BPRS. From 1992 to October 2018,

the number of BUS in Indonesia reached 14 banks,

UUS reached 34 units and BPRS reached 168 banks

(OJK, 2018b).

Obtaining proﬁts is the main goal of the estab-

lishment of a business entity, both business entities in

the form of Perseroan Terbatas (PT), foundations and

other forms of business entities (Sintiya, 2018), and

one of them is Islamic banking. The growth of Islamic

banking industry in Indonesia can be seen from the

growth net proﬁt both BUS, UUS, and BPRS which

have increased every year (OJK, 2018b).

One of the ways to increase the proﬁtability of Is-

lamic banking industry is efﬁciency. Efﬁciency mea-

surements are used to analyze bank performance (Ma-

jeed and Zainab, 2017). Efﬁciency in the banking

system is very important because the efﬁciency of a

bank shows the progress of the bank. If the bank does

not operate efﬁciently, it will cause problems for the

bank. Therefore the efﬁciency of the banking system

is emphasized because of the efﬁciency of the bank-

ing system will cause banks to get high proﬁts (Hus-

sain et al., 2012). The current measure of efﬁciency

of Islamic banking is the percentage of BOPO (Biaya

Operasional dan Pendapatan Operasional).

Despite increasing proﬁts, the percentage of Is-

lamic banking BOPO ﬂuctuated. This can be seen

from the percentage of BOPO, Bank Umum Syariah

until 2018 which is still at the level of 89.36%. Judg-

ing from the BOPO percentage, the operations of

Bank Umum Syariah are still inefﬁcient. Even though

the lower the BOPO percentage, that is better because

it shows an increasingly efﬁcient bank. BI continues

to press the BOPO percentage to be 60% -70%. This

aims to approach BOPO of Southeast Asian banks

which reach 40-60% (Sutaryono, 2013).

With these conditions, the challenges of Islamic

banking in carrying out their activities are also get-

ting bigger. Islamic banks industry need to improve

Maulana, M.

Analysis of the Effect of Internal and External Factors on the Inefﬁciency Toward Proﬁtability of Islamic Banking Industry in Indonesia.

DOI: 10.5220/0009868502830287

In Proceedings of the International Conference on Creative Economics, Tourism and Information Management (ICCETIM 2019) - Creativity and Innovation Developments for Global

Competitiveness and Sustainability, pages 283-287

ISBN: 978-989-758-451-0

283

their efﬁciency in operational activities (Puteh et al.,

2017). The efﬁciency of Islamic banking is inﬂuenced

by internal and external factors. Efﬁciency describes

performance in producing the desired maximum out-

put from a number of inputs provided with available

technology. Efﬁciency is said to increase when maxi-

mum output is produced without changes in inputs or

with fewer inputs (Wahab and Rahman, 2012).

This research is intended to discuss the factors that

inﬂuence inefﬁciency in Islamic banks which consist

of problematic ﬁnancing (NPF), bank size, and inﬂa-

tion, and the impact of Islamic bank inefﬁciency on

proﬁt. The identiﬁed model can help understand the

factors that inﬂuence the inefﬁciency of Islamic banks

and their impact on proﬁt.

2 LITERATURE REVIEW

2.1 Proﬁtability

Proﬁtability is one way to assess a company’s man-

agement ability to make a proﬁt (Sintiya, 2018). Prof-

itability is an indicator of the company’s success,

especially its ability to generate proﬁts by utilizing

its resources such as assets or equity (Mubarok and

Rohman, 2013). Some measures for calculating the

level of proﬁtability include ROE (Return on Equity),

ROA (Return on Assets) and Net Proﬁt Margin. Com-

panies with high proﬁtability will reveal more infor-

mation. This is because high proﬁtability indicates

how companies can manage risk well. The ratio com-

monly used to measure the performance of proﬁtabil-

ity or rentability is ROA. ROA shows the ability of

bank management to generate income from the man-

agement of assets owned (Sintiya, 2018).

2.2 Efﬁciency

performance (Majeed and Zainab, 2017). Efﬁciency

in the banking system is very important because the

efﬁciency of a bank shows the progress of the bank

in performance that will have an impact on increasing

proﬁts (Hussain et al., 2012). Banking efﬁciency can

be observed from two sides, namely in terms of costs

(cost efﬁciency) and proﬁtability (Suseno, 2008). In

terms of costs (cost efﬁciency), banks are compared

with other banks to ﬁnd out the management of costs

and production with the same output and technol-

ogy. Whereas in terms of proﬁt (proﬁt efﬁciency),

the ability of banks to generate proﬁts in each input

unit is used to measure the level of banking efﬁciency

(Suseno, 2008).

2.3 Non-Performing Finance to

Inefﬁciency

High Non-Performing Financing (NPF) will increase

the cost so that it has the potential for bank losses.

The higher the ratio, the worse the quality of bank ﬁ-

nancing that causes the number of problematic ﬁnanc-

ing to increase, and therefore the bank must bear the

losses in its operational activities so that it affects the

decrease in the level of efﬁciency and the decrease in

proﬁts obtained by the bank (Wahab, 2015).

NPF causes the potential proﬁt to be obtained to

be smaller, because the bank will allocate funds to

form Penyisihan Aktiva Produktif (PPAP). Therefore,

the bank needs to reserve it as an attitude to deal with

it by charging a certain percentage of the ﬁnancing

disbursed. This Penyisihan Aktiva Produktif (PPAP)

in the balance sheet of Islamic banking has the char-

acter of reducing earning assets, thus inﬂuencing efﬁ-

ciency and proﬁtability (Kasmir, 2003). Based on the

explanation above can be drawn a hypothesis:

H1: Non-Performing Financing (NPF) has a posi-

tive and signiﬁcant effect on inefﬁciency

2.4 Bank Size (Assets) to Inefﬁciency

Bank size is a description of the size of a company.

The size of the bank can be expressed by total assets,

ﬁnancing, and market capitalization (Amran et al.,

2009). Bank size is one of the characteristics that

are speciﬁc to banks that are generally and are deter-

minants and efﬁciency of banks (Sari and Saraswati,

2017). Banks with relatively large total assets will

have a better level of efﬁciency because they have

relatively large total revenue as a result of increased

product sales. With the increase in total revenue,

it will increase the company’s proﬁt (Wahab, 2015).

Based on the explanation above can be drawn a hy-

pothesis:

H2: Bank size has a negative and signiﬁcant effect

on inefﬁciency

2.5 Inﬂation to Inefﬁciency

purchasing power accompanied by a decrease in the

ability to save funds in banks (Endri, 2015). The de-

crease in the amount of funds deposited in banks due

to high inﬂation rates has an impact on the perfor-

mance of banks burdened with high operational costs,

while their income from interest is reduced so that

the bank becomes inefﬁcient in its operational activ-

ities. Inﬂation has the potential to hinder the growth

of credit itself. While income from the credit sector

ICCETIM 2019 - International Conference on Creative Economics, Tourism Information Management

284

will be small. This affects the proﬁtability of the bank

concerned (Wibowo and Syaichu, 2013).

When inﬂation is at a normal level, the economic

enthusiasm will increase the bank’s proﬁtability, so

banks can improve their efﬁciency. Preferably, when

economic conditions are depressed and on the other

hand inﬂation is higher, it will increase the risk of

proﬁtability and / or decrease bank efﬁciency, unless

the bank is able to race faster to increase interest (for

conventional banks) or for Islamic banks to increase

bank service revenues or rent from sharia products

(Asngari, 2013). Based on the explanation above can

be drawn a hypothesis:

H3: Inﬂation has a positive and signiﬁcant effect

on inefﬁciency

2.6 Inefﬁciency to Proﬁtability

The efﬁciency of the banking system needs to be con-

sidered because the efﬁciency of the banking sys-

tem will cause banks to get high proﬁts (Hussain

et al., 2012). The current measure of efﬁciency of

Islamic banking is the percentage of BOPO. Biaya

Operasional dan Pendapatan Operasional (BOPO) is

a comparison between operating costs and operating

income. The operational cost ratio is used to mea-

sure the level of efﬁciency and ability of banks in

conducting operations. The lower BOPO means the

more efﬁcient the bank is in controlling its operational

costs, with the existence of cost efﬁciency, the prof-

its obtained by the bank will be even greater (Sintiya,

2018). Based on the explanation above can be drawn

a hypothesis:

H4: inefﬁciency has a negative and signiﬁcant ef-

fect on the proﬁtability of Islamic banking

3 METHODS AND EQUIPMENT

This study is intended to discuss the factors that inﬂu-

ence inefﬁciency in Islamic banking industry which

consists of Non-Performing Finance (NPF), Bank

Size, and inﬂation, and the impact of Islamic bank-

ing inefﬁciency on Islamic banking proﬁt. The re-

search method used is quantitative, because the re-

search data in the form of numbers and analysis us-

ing statistics. The population in this study is the

Bank Umum Syariah (BUS) and Unit Usaha Syariah

(UUS) which publishes monthly reports to Bank In-

donesia (BI) or the Otoritas Jasa Keuangan (OJK) for

the period 2009-2018, so this research uses time se-

ries data. In other words, the method used in this re-

search is the census method. Refers to the opinions

of experts(Hair Jr et al., 2016)(SUHARTANTO et al.,

2018), Data analysis techniques used in this study

are path analysis (analysis path) using the PLS-SEM

(Partial Least Square Structural Equation Modeling)

method. Data processing is done using WarpPLS 6.0

software (Hair Jr et al., 2016)(SUHARTANTO et al.,

2018).

4 RESULT

The results of data processing carried out showed

that the percentage of goodness of ﬁt (GoF) was

0.885, and indicated that the suitability of the ideal

model. Furthermore, Average block VIF (AVIF) has

an acceptable percentage of 2.076 and Average full

collinearity VIF (AFVIF) also has an acceptable and

ideal percentage at a value of 4.978 as well as Symp-

son’s paradox ratio (SPR) which has an acceptable

percentage of 0.667 . Finally, the R-squared contribu-

tion ratio (RSCR) shows an acceptable percentage as

well at 0.960 and a Statistical suppression ratio (SSR)

of 1,000 can fulﬁll the model match. As per the indi-

cators that must be fulﬁlled in WarpPLS, the models

compiled in this study are appropriate.

4.1 Path Analysis

Based on the conditions that must be fulﬁlled in the

PLS-SEM analysis using the WarpPLS analysis tool,

it can be concluded through the ﬁnal results which

will be shown in the ﬁgure below:

Figure 1: Result of Testing The Model

Non-Performing Finance (NPF) and Bank Size

have a positive and signiﬁcant effect on sharia bank-

ing inefﬁciencies with coefﬁcients of 0.37 with sig-

niﬁcance ¡0.01 and 0.57 with signiﬁcance ¡0.01. This

shows the greater the Non-Performing Finance (NPF)

and the greater the size of the bank, the higher the

bank inefﬁciency. This shows that the management

of Islamic banks must maintain that the percentage of

Non Performing Finance (NPF) and bank size is al-

ways maintained. In addition, inﬂation does not have

a signiﬁcant effect on bank inefﬁciency. This shows

that the rise and fall of inﬂation does not affect the

level of bank inefﬁciency at all. This is inﬂuenced by

Analysis of the Effect of Internal and External Factors on the Inefﬁciency Toward Proﬁtability of Islamic Banking Industry in Indonesia

285

the majority of Islamic bank ﬁnancing is murabahah

which requires banks to ﬁrst buy goods in full, so that

the rising and falling percentage of inﬂation does not

affect the inefﬁciency of Islamic banks. This shows

that the rise and fall of inﬂation does not affect the

level of efﬁciency of the bank. Inefﬁciency has a neg-

ative and signiﬁcant effect on bank proﬁt with a co-

efﬁcient of -0.92 with a signiﬁcance of ¡0.01. Based

on the results of this study, it can be seen that bank

inefﬁciencies affect bank proﬁts, the higher bank in-

efﬁciencies it will reduce bank proﬁts.

5 CONCLUSION, LIMITATION

AND FUTURE RESEARCH

The main of this study was to examine the effect of

Non-Performing Finance (NPF), bank size, and in-

ﬂation on Islamic banking industry inefﬁciencies and

the effect of Islamic banking industry inefﬁciencies

on proﬁtability. Overall, the results of this study indi-

cate that non-performing ﬁnance internal factors and

bank size have a signiﬁcant effect on Islamic bank-

ing industry inefﬁciency, although this study also re-

vealed that inﬂation external factors have no signiﬁ-

cant effect on inefﬁciencies. Other results reveal that

inefﬁciency has a signiﬁcant effect on the proﬁtability

of Islamic banking industry.

This research shows that every bank needs to

know the steps so that the Islamic banking industry in

Indonesia remains efﬁcient in carrying out bank op-

erations. Islamic Banking needs to reduce the level

of Non-Performing Finance (NPF) respectively, and

control asset variables to be efﬁcient. Although the

results show that inﬂation does not have a signiﬁcant

effect on the efﬁciency of Islamic banking industry,

Islamic banking industry management must remain

vigilant against various other external variables.

This study has several limitations. First, the vari-

ables that affect proﬁtability in this study are only

one variable, namely the inefﬁciency indicated by the

BOPO percentage. For further research other vari-

ables that can affect proﬁtability can be added, so that

a comparison of which variables can have a greater

impact on the Islamic banking industry can be made.

Second, further research is recommended to add vari-

ables that have not been studied in this study and add

internal factors and other external factors that inﬂu-

ence inefﬁciencies, such as exchange rates, Islamic

ﬁnance, and overhead costs.

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