The analysis of the effect of Islamic financing and labor relationship development toward nonperforming financing in Islamic banks

Abstract

PurposeThe purpose of this study is to examine the effect of Islamic financing (IF) and labor relationship development (LRD) toward nonperforming financing (NPF) in Islamic banks. This research aims to identify the connection between IF products and the practice of loan officers building a relationship with loan customers (also known as LRD) and its influence on NPF.Design/methodology/approachThis study uses a quantitative field research that emphasizes upon analysis of numerical data which are processed with statistical methods. Furthermore, the source is secondary data from financial statements of Islamic banks such as annual reports or financial disclosures. These sources of data are used to examine NPF facilities from 2008 to 2012. Moreover, primary data collected via questionnaire are used to investigate IF and LRD. The banks where the study was conducted are: Bank Muamalat Indonesia and Bank Danamon Shari’ah in Surakarta, Indonesia. The population in this study is 15 employees who work as account officers in Bank Muamalat Indonesia and Bank Danamon Shari’ah. The techniques of data collection in this study are documentation, questionnaires and literary study. In this study, the data analysis technique was multiple regression analysis and examination using SPSS version 21. These methods were used for analyzing the effect of IF and LRD toward NPF.FindingsIF has a significant effect on NPF. In contrast, the LRD has no effect on NPF in Islamic banks. In addition, both IF and LRD simultaneously had an effect on NPF in Islamic banks.Research limitations/implicationsThis study does not cover all Islamic banks in Surakarta because of limited data; thus, in future research, the sample size could be increased by including all Islamic banks in Surakarta, Indonesia. Furthermore, this study does not take into consideration the fact that IF includes product financing. For future studies, the population and samples should be improved and take into consideration that product financing does exist in Islamic banks; moreover, future studies could provide other variables which are appropriate for current studies.Originality/valueThe results support the recommendation for Islamic banks in Surakarta to enhance the capability of employees to develop their knowledge in IF. Because the performance of a bank does not only depict financial performance but also nonfinancial performance such as services, knowledge and employees’ performance.