Abstract
This paper investigates the impact of bank-specific and macroeconomic variables on the profitability of Islamic rural bank (BPRS) in Indonesia. Using monthly time series data from January 2010 - December 2018. The estimation model used is a vector error correction model to analyze the long-term and short-term relationships between bank-specific and macroeconomic variables on the profitability of Islamic rural bank. The results showed that CAR and LnTA had a significant positive relationship, while NPF, BOPO and IPI had a negative and significant relationship to the profitability of Islamic rural banks. But FDR and Inflation variables are not significantly related to the profitability of Islamic rural bank. The results leave implications for policy makers, investors and banking sector managers. Based on evidence that bank profitability is more influenced by internal banks (as specific as banks), this research can help Islamic rural banks to help them understand which factors are important to be analyzed to obtain higher profitability.
Highlights
In any economy, banks have a primary role as financial intermediaries between unit surplus and deficit
Bank specific variables are Return on Asset (ROA), Capital Adequacy Ratio (CAR), Non Performing Finance (NPF), Finance to Deposit Ratio (FDR), Operating Cost of Operating Income (BOPO), Total Aset from Otoritas Jasa Keuangan; Economic growth rate is proxied by Industrial Production Index variables were collected from the Central Bureau of Statistics Indonesia; and Inflation variable is collected from the Bank Indonesia
In long run we found that five variables are statistically significant such as CAR, NPF, by Operating Cost of Operating Income (BOPO), LnTA, and Industrial Production Index (IPI)
Summary
Banks have a primary role as financial intermediaries between unit surplus and deficit. Laryea et al, (2016) investigate the bank-specific and macroeconomic determinants of non performing loans on bank profitability from an emerging market in Ghana period 2005-2010. Yudha et al, (2017) found that non performing loan in domestic and foreign bank are negative and significant impact to bank profitability. The result showed that in loan to deposit ratio in foreign bank has a negative and significant influence to bank profitability. Bank specific variables are Return on Asset (ROA), Capital Adequacy Ratio (CAR), Non Performing Finance (NPF), Finance to Deposit Ratio (FDR), Operating Cost of Operating Income (BOPO), Total Aset (bank Size) from Otoritas Jasa Keuangan (https://ojk.go.id); Economic growth rate is proxied by Industrial Production Index variables were collected from the Central Bureau of Statistics Indonesia (http://www.bps.go.id); and Inflation variable is collected from the Bank Indonesia (http://www.bi.go.id).
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