Abstract
This study aims to investigate the role of discretionary loan loss provision of sharia financing on the Islamic commercial banks’ financial performance in Indonesia. Partial Least Squares-Structural Equation modeling (PLS-SEM) is used to examine the relationship between loan loss provisions and financial performance in 13 Islamic commercial banks for 4.5 years. The analysis of the outer model shows that the probability of default and loss given default are determinants of loan loss provision, while financial performance is determined by return on assets, non-performing financing, net operating margin, and operating costs on operating income. The results of this study indicate that loan loss provisions have a direct effect on financial performance. Further investigation shows that the return on sharia financing contributes to increasing the impact of loan loss provisions on financial performance (indirect influence). The findings contribute to the literature by showing that discretionary loan loss provision can occur in sharia financing. The study is very important in terms of awareness of management behavior related to financial performance. The study has implications for management policies related to the prerequisites of potential clients.
Highlights
Sharia is one of the solutions offered by Islamic banks to avoid riba transactions
This study aims to investigate the role of discretionary loan loss provision of sharia financing on the Islamic commercial banks’ financial performance in Indonesia
The direct effect of loan loss provisions on financial performance is indicated by the magnitude of
Summary
Sharia is one of the solutions offered by Islamic banks to avoid riba transactions. At the time the contract is made, both Islamic banks (the investor and the customer) do not set specific interest rates as profits received or expenses to be paid. 04) defines sharia as a contract of business cooperation between two parties where the first party (the owner of the fund) provides all funds, while the second party (fund manager) acts as a manager. The definition implies that the Bank can act as both the owner of the fund and the fund manager. Sharia funds disbursed by fund owners (the Bank) are recognized as sharia investments when cash payments or transfers of non-cash assets to fund managers occur Sharia funds disbursed by fund owners (the Bank) are recognized as sharia investments when cash payments or transfers of non-cash assets to fund managers occur (PSAK, 2007, par. 12)
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