Abstract
This study's main objective is to investigate equity-based financing and debt-based financing of the profitability of Islamic banking in Indonesia. This research is expected to contribute to the theoretical and practical dimensions. On the conceptual aspect, this study can provide evidence of whether equity-based financing and debt-based financing affect the profitability of Islamic banking. While on the practical dimension, Islamic banks in Indonesia can determine the extent of their profitability and, in turn, the competitiveness of Islamic banks to enable it to be developed in line or even better than conventional banks. The data analysis technique uses panel data regression, which is time series data and cross-section. Next, to estimate the panel data model, which is divided into three, namely: common effect, fixed effect, and random effect. The result of this study that partially equity-based financing does not affect ROE. At the same time, debt-based financing influences the ROE of Islamic banks. Partially equity-based financing and debt-based financing do not affect ROA of Islamic banks. However, it simultaneously shows that the independent variable test results, namely equity-based financing and debt-based financing, have a strong influence on the dependent variable, namely, profitability as measured by ROA and ROE.
Highlights
In 2019, the development of Islamic banking in Indonesia experienced a rapid growth (OJK, 2019), the macro and microeconomic conditions experienced a slowdown in various regions (Bank Indonesia, 2019)
The findings indicated that partially and simultaneously, there was no significant effect of debt-based financing and equity-based financing on cash ratio at PT
The findings of this study indicated that debt-based financing had a negative and significant effect on profitability measured using Return on Assets (ROA) and Return on Equity (ROE)
Summary
In 2019, the development of Islamic banking in Indonesia experienced a rapid growth (OJK, 2019), the macro and microeconomic conditions experienced a slowdown in various regions (Bank Indonesia, 2019). The growth was driven by multiple factors, ranging from the increasing Islamic banking networks, number of third parties’ funds, and financing performance which nationally stimulated growth in the market share. As an intermediary financial institution, Islamic banks rely on the distribution of funds or financing to benefit their operations. The Islamic bank financing model uses a profit and loss sharing scheme and trade financing. There are differences in risk characteristics between them which affect the amount of profit. According Iqbal and Molyneux (2005), this financing distribution scheme is based on the equity-based financing and debt-based financing
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