Determinants of Non Performing Financing in Indonesian Islamic Banks

Indonesian economy depends heavily on banking sector as engine to grow. Banking sector remains the important infrastructure for the businesses to expand their activities. For this reason, ensuring the soundness of bank performance is an important thing to do. Among variable in this issues is Non Performing Loan. This variable should be maintained in such level to ensure financial intermediation works. Failure to do so would negatively affect the Indonesian economy. Meanwhile, the Islamic banking Industry is growing at a faster rate than conventional banking industry in this largest muslim population. It has been established for more than thirty years to support the Indonesian economy and it is timely to look into the performance especially on the financing risk performance (Non Performing Financing). Hence, this paper seeks the determinants of the Non Performing Financing in Islamic Bank in Indonesia. To get the comprehensive analysis, determinants of the conventional Non Performing Loan is also taken up. Data from January 2004 to September 2014 is adopted with variables of capital adequacy, financing rate, interest rate, Islamic financing, conventional loan, industrial production index as a proxy for GDP, price, and exchange rate. Ranges of time series econometric techniques are utilized. Some recommendations are, firstly, the government shall maintain economic performance to keep the NPF and NPL as low as possible. Secondly, FDR based RR policy imposed by central bank, as regulator, to Islamic banks seems to be effective in developing real sector and it shall be adopted in the conventional banks.