The impact of good corporate governance and Sharia compliance on the profitability of Indonesia’s Sharia banks

Nur Fitriana Hamsyi

doi:10.21511/ppm.17(1).2019.06

Abstract

This article aimed to observe the influence of Good Corporate Governance (GCG) and Sharia compliance on the profitability of Sharia banks in Indonesia. This study uses secondary data obtained from 2012 until 2016 with nine samples of Indonesia’s Sharia banks according to purposive sampling criteria. Data are processed by using data panel regression analysis. The independent variables used are the composite value of GCG, which is the result of the self-assessment of the Sharia bank, as well as the proxy of Sharia compliance, namely Islamic Income Ratio (IsIR) and Profit Sharing Ratio (PSR), while the dependent variable used is profitability with a Return on Equity (ROE) as the proxy. The results showed that GCG and PSR variables have negative values indicating that there is no influence of GCG and PSR on ROE, while the variable of IsIR influences ROE value. This study provides benefits in presenting useful information to assess the compliance of Islamic banks based on Sharia principles.

Highlights

The current global economic development provides rapid changes, so it must be adapted quickly by companies including Sharia banks to compete competitively with other banks
The independent variables used are the composite value of Good Corporate Governance (GCG), which is the result of the self-assessment of the Sharia bank, as well as the proxy of Sharia compliance, namely Islamic Income Ratio (IsIR) and Profit Sharing Ratio (PSR), while the dependent variable used is profitability with a Return on Equity (ROE) as the proxy
The results showed that GCG and PSR variables have negative values indicating that there is no influence of GCG and PSR on ROE, while the variable of IsIR influences ROE value

Summary

Introduction

The current global economic development provides rapid changes, so it must be adapted quickly by companies including Sharia banks to compete competitively with other banks. The existence of competition in this business makes the bank eager to improve its performance. It is a mechanism that organizes the relationship between management performance and the interests of stakeholders so that the effectiveness and efficiency of the company can be realized and it makes shareholders’ trust increase (Grantham, 2004; Rajagopalan & Zhang, 2008). Weak GCG implementation worsens the performance of a company, and it can cause an economic crisis in a country, even global crisis. One of the causes of the Asian crisis in 1998 was the failure of GCG implementation to trigger macroeconomic fundamentals to be very fragile (Iramani et al, 2018; Johnson et al, 2000; Siswanti et al, 2017) and many companies collapsed (Sanchia & Zen, 2015). With GCG mechanism and supervision, inefficiency due to moral hazard and adverse selection can be minimized

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Methods

Conclusion