Abstract
Financing is the main source of Islamic bank income as a financial intermediary that will contribute to the bank’s profitability. There are two financing schemes, namely profit–loss-sharing financing and nonprofit–loss-sharing financing. The main purpose of this study is to analyze the impact of profit–loss-sharing financing on the Islamic bank’s profitability. We employ 31 Islamic commercial banks in Indonesia using quarterly data and spanning from 2016 Q1 to 2020 Q4. Dynamic panel regression using the two-step system GMM is applied. The results showed that profit–loss-sharing financing has a negative effect on profitability, suggesting that profit–loss financing discourages Islamic bank performance. Meanwhile, some control variables such as size and liquidity risk positively influence profitability and low efficiency, and financing quality negatively affects profitability. These findings have an important implication for Islamic banks. Islamic banks must conduct tight monitoring for PLS financing so that this ex-post scheme can encourage the performance of Islamic banks.
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