Are the Financial Indicators Relevant in Measuring the Performance of Islamic Banks?

Abstract

This study was directed to determine the impact of financial indicators compiled in public reports on the long-term and short-term performance of Islamic banks in Indonesia. The scope of this study is between 2017 and 2021. This study uses the Vector Error Correction Model (VECM) method. The analytical steps used in VECM modeling are Granger causality, long-term and short-term VECM analysis, impulse response functions, and variance decomposition. Results of this study show that the independent variables subsisting of BOPO, CAR, FDR, MFP, NPF, and STM have long-term effects on ROA. However, CAR variables do not show significant impacts in the short term. The implications of this research are to back business efficiency in other banking services such as safe deposit boxes, hedging activities, and manufacturing sector financing based on more accountable and credible risk management. The freshness of this study is that it incorporates the results of Granger causality analysis, which reveals bidirectional relationships for each variable. In addition, Granger causality shows correlations, allowing study variables to be explored more deeply in further studies.
 Keywords: financial indicators, Vector Error Correction Models, Islamic banks, performance