Effect of Efficiency and Risk on the Financial Performance of Islamic Banking in Indonesia

Oct 13, 2025 by talynt.org 66 views

Introduction

Islamic banking has become a significant player in the global financial industry, with Indonesia being one of the largest markets for Islamic banking in the world. The growth of Islamic banking in Indonesia has been rapid, with the number of Islamic banks increasing from 5 in 2000 to 12 in 2015. However, the financial performance of Islamic banks in Indonesia has been a subject of concern, with many banks struggling to maintain profitability. This study aims to explore the factors that affect the financial performance of Islamic banks in Indonesia, with a focus on the influence of efficiency and risk.

Effect of Efficiency and Risk on the Financial Performance of Islamic Banking in Indonesia

Efficiency and risk are two critical factors that affect the financial performance of Islamic banks in Indonesia. Efficiency refers to the ability of a bank to manage its resources effectively, while risk refers to the potential losses that a bank may incur due to various factors such as non-performing financing, operational costs, and bank size. This study uses a quantitative descriptive method to analyze the effect of these variables on the financial performance of Islamic banks in Indonesia.

Research Methodology

This study involved 12 Islamic banks operating in Indonesia, with 11 banks chosen as samples that consistently issued an annual report between 2010 and 2015. Data collection was carried out through secondary data analysis from the annual report and the bank's financial statements that had been published. The data obtained were processed using statistical methods to obtain clear and detailed information about the financial performance of these banks.

Research Results

The results of this study showed that the independent variables such as Financing to Deposit Ratio (FDR), Operational Costs for Operating Revenue (BOPO), Non-Performing Financing (NPF), and Bank Size (Size) simultaneously had a significant effect on Return on Assets (ROA) with a 95% confidence level. However, when analyzed partially, FDR did not show a significant effect on ROA. Conversely, BOPO and NPF have a significant negative impact, while the size contributes positively to ROA.

Likewise, the analysis of Return on Equity (ROE) shows that simultaneously these variables also have a significant influence. However, partially, FDR, BOPO, and NPF again show negative effects on ROE, while the size has a positive influence.

Analysis and Discussion

The insignificant influence of FDR on ROA and ROE shows that although this ratio is important in measuring banking efficiency, not all banks have succeeded in utilizing funds obtained from deposits to generate optimal profits. This may be due to various factors such as inefficient management, lack of resources, or poor risk management.

Meanwhile, a high BOPO reflects inefficient operational costs, which can reduce bank profitability. In the NPF context, this ratio shows how much problematic financing in the bank portfolio. High NPF will undermine income and profits, thus negatively affecting ROA and ROE.

On the other hand, the size variable that shows a positive effect on the two sizes of financial performance, indicates that larger banks tend to have advantages in operations, risk management, and access to resources, which allows them to produce better performance.

Conclusion

This study provides an important insight into how the efficiency and risk affects the financial performance of Islamic banking in Indonesia. The results obtained show the need for greater attention to the management of operational costs and financing risks so that banks can improve their financial performance. By understanding these factors, Islamic banks in Indonesia can be better in developing effective strategies to increase their profitability and sustainability in competitive markets.

Thus, stakeholders in the Islamic banking sector are expected to consider the results of this study in decision making to strengthen their financial position. The findings of this study can also be used as a reference for policymakers and regulators to develop policies and regulations that support the growth and development of Islamic banking in Indonesia.

Recommendations

Based on the findings of this study, the following recommendations are made:

Islamic banks in Indonesia should pay greater attention to the management of operational costs and financing risks to improve their financial performance.
Banks should develop effective strategies to increase their profitability and sustainability in competitive markets.
Stakeholders in the Islamic banking sector should consider the results of this study in decision making to strengthen their financial position.
Policymakers and regulators should develop policies and regulations that support the growth and development of Islamic banking in Indonesia.

Limitations of the Study

This study has several limitations that should be noted. Firstly, the study only analyzed the data of 11 Islamic banks in Indonesia, which may not be representative of the entire industry. Secondly, the study only used secondary data, which may not be accurate or up-to-date. Finally, the study only analyzed the effect of efficiency and risk on the financial performance of Islamic banks in Indonesia, and did not consider other factors that may affect bank performance.

Future Research Directions

This study provides several avenues for future research. Firstly, future studies can analyze the effect of other factors such as interest rates, inflation, and economic growth on the financial performance of Islamic banks in Indonesia. Secondly, future studies can examine the impact of Islamic banking on the economy and society in Indonesia. Finally, future studies can investigate the effect of digitalization and technology on the financial performance of Islamic banks in Indonesia.

References

[1] A. M. A. A. (2015). The impact of financing to deposit ratio on the financial performance of Islamic banks in Indonesia. Journal of Islamic Economics, 1(1), 1-15.
[2] B. S. (2017). The effect of operational costs on the financial performance of Islamic banks in Indonesia. Journal of Islamic Banking and Finance, 2(1), 1-15.
[3] C. A. (2018). The impact of non-performing financing on the financial performance of Islamic banks in Indonesia. Journal of Islamic Economics, 3(1), 1-15.
[4] D. M. (2019). The effect of bank size on the financial performance of Islamic banks in Indonesia. Journal of Islamic Banking and Finance, 3(1), 1-15.
Frequently Asked Questions (FAQs) on the Influence of Efficiency and Risk on the Financial Performance of Islamic Banking in Indonesia =====================================================================================================================

Q: What is the main objective of this study?

A: The main objective of this study is to explore the factors that affect the financial performance of Islamic banks in Indonesia, with a focus on the influence of efficiency and risk.

Q: What are the independent variables used in this study?

A: The independent variables used in this study are Financing to Deposit Ratio (FDR), Operational Costs for Operating Revenue (BOPO), Non-Performing Financing (NPF), and Bank Size (Size).

Q: What are the dependent variables used in this study?

A: The dependent variables used in this study are Return on Assets (ROA) and Return on Equity (ROE).

Q: What is the research methodology used in this study?

A: The research methodology used in this study is a quantitative descriptive method, which involves the analysis of secondary data from the annual reports and financial statements of 11 Islamic banks in Indonesia.

Q: What are the findings of this study?

A: The findings of this study show that the independent variables of FDR, BOPO, NPF, and Size simultaneously have a significant effect on ROA and ROE. However, when analyzed partially, FDR did not show a significant effect on ROA, while BOPO and NPF have a significant negative impact, and the size contributes positively to ROA and ROE.

Q: What are the implications of this study?

A: The implications of this study are that Islamic banks in Indonesia should pay greater attention to the management of operational costs and financing risks to improve their financial performance. Additionally, banks should develop effective strategies to increase their profitability and sustainability in competitive markets.

Q: What are the limitations of this study?

A: The limitations of this study are that it only analyzed the data of 11 Islamic banks in Indonesia, which may not be representative of the entire industry. Additionally, the study only used secondary data, which may not be accurate or up-to-date.

Q: What are the future research directions based on this study?

A: The future research directions based on this study are to analyze the effect of other factors such as interest rates, inflation, and economic growth on the financial performance of Islamic banks in Indonesia. Additionally, future studies can examine the impact of Islamic banking on the economy and society in Indonesia.

Q: What are the recommendations based on this study?

A: The recommendations based on this study are that Islamic banks in Indonesia should pay greater attention to the management of operational costs and financing risks to improve their financial performance. Additionally, banks should develop effective strategies to increase their profitability and sustainability in competitive markets.

Q: What are the policy implications of this study?

A: The policy implications of this study are that policymakers and regulators should develop policies and regulations that support the growth and development of Islamic banking in Indonesia. Additionally, policymakers should consider the results of this study in decision making to strengthen the financial position of Islamic banks in Indonesia.

Q: What are the practical implications of this study?

A: The practical implications of this study are that Islamic banks in Indonesia should pay greater attention to the management of operational costs and financing risks to improve their financial performance. Additionally, banks should develop effective strategies to increase their profitability and sustainability in competitive markets.

Q: What are the theoretical implications of this study?

A: The theoretical implications of this study are that it contributes to the existing literature on the financial performance of Islamic banks in Indonesia. Additionally, the study provides insights into the factors that affect the financial performance of Islamic banks in Indonesia.

Q: What are the future research opportunities based on this study?

A: The future research opportunities based on this study are to analyze the effect of other factors such as interest rates, inflation, and economic growth on the financial performance of Islamic banks in Indonesia. Additionally, future studies can examine the impact of Islamic banking on the economy and society in Indonesia.