Financing Risk in Islamic Rural Banking in Indonesia: Internal and External Factors Determining
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Abstract
Financing risk is the most vital aspect in banking, so it must be managed so that it does not increase. The purpose of this study is to test the factors that determine financing risk. Financing risk is measured by non-performance financing (NPF), while the factors that are suspected of influencing financing risk consist of internal and external factors. Internal factors consist of profitability as measured by return on assets (ROA), capital as measured by capital adequacy ratio (CAR), liquidity risk as measured by financing to deposit ratio (FDR), and bank efficiency level as measured by operating expense to operating income ratio (EIR). While external factors consist of inflation rate, and Bank Indonesia interest rate. The population in this study were Islamic Rural Banks (IRBs) operating in Indonesia as many as 164 IRBs. Samples were taken as many as 75 IRBs with purposive sampling. The observation period was 4 years with quarterly data so that 1,200 observation data were collected. Hypothesis testing used panel data regression analysis by selecting three panel data regression models. After being tested with chow-test, Hausman-test, and Lagrange Multiplier-test, the common effect model was obtained as the best model. The results of the study with the common effect model are profitability (ROA), capital (CAR), efficiency level (EIR), and BI-rate have a positive and significant effect on financing risk. While liquidity risk (FDR) and inflation do not affect financing risk.
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