What Drives Profitability of Islamic Banks?: Fresh Insights from Indonesia using Vector Error Correction Model (VECM) Approach
Sri Yayu Ninglasari, Nugroho Priyo Negoro, M. Fikri Himmawan, Santy Dwi Cempaka

Department of Business Management, Faculty of Creative Design and Digital Business, Institut Teknologi Sepuluh Nopember, Indonesia
Department of Islamic Economics, Faculty of Economics and Business, Universitas Airlangga, Indonesia

Abstract

This study aims to investigate the impact of various Islamic financing components, namely mudharabah, murabahah, musharakah, liquidity, and financing risk, on the profitability of Islamic banking institutions in Indonesia over the period spanning from 2011 to 2020. The research adopts a quantitative approach to comprehensively understand the short-term and long-term effects of these variables on the dependent variable, which is the profitability of Islamic banks. The dataset employed in this research consists of panel data pertaining to Islamic banking in Indonesia during the specified time frame. The data analysis employs the vector error correction model method to process and examine the information. The outcomes of the estimation tests reveal that each of the variables, both in the short term and long term, significantly impacts the return on assets of Islamic banking institutions in Indonesia throughout the period from 2011 to 2020. These findings highlight that changes in mudharabah, musharakah, murabahah, non-performing financing, and financing-to-deposit ratio in Indonesian Islamic banks have led to responses and alterations in the return on asset of these institutions over the specified timeframe. In summary, this study provides valuable insights into the relationship between Islamic financing components and the profitability of Islamic banks in Indonesia, contributing to a deeper understanding of the financial dynamics within this sector over the last decade.

Keywords: Islamic Banks, Islamic Financing, Profitability, VECM

Topic: Business and Economic