IJIBEC
Vol 8 No 2 2024 International Journal of Islamic Business and Economics Available at https://e-journal.
id/Ijibec/index ISSN
E-ISSN
2615-420X
The Mediating Role of Non-Performing Financing (NPF) in the Financial Performance of Islamic Commercial Banks in Indonesia Muthmainnah1.
Tiara1*.
Titin Kartini1 1Faculty of Education.
Jember University Indonesia Corresponding Author: iara@unej.
Article Info Abstract This study explores the impact of mudharabah and ijarah financing on the financial performance of Islamic commercial banks in Indonesia, with NonArticle History:
Received : 25 November 2024 Performing Financing (NPF) as a mediating variable.
It addresses the Reviewed: 02 Decemberl 2024 challenge of maintaining profitability while managing financing risks in Accepted : 09 December 2024 Indonesia's Islamic banking sector.
Using a quantitative approach.
Published : 09 December 2024 secondary data from 2021 to 2023 were analyzed, sourced from the Financial Services Authority (OJK) and financial reports of Islamic banks.
Path analysis with IBM AMOS 22 was conducted to assess the direct and indirect effects of these financing types on Return on Assets (ROA).
The results show that mudharabah financing does not significantly affect NPF or ROA, while ijarah financing has a significant negative impact on both.
NPF plays a key role as a mediating variable, with a total indirect effect of 5% on profitability.
However, the size of this effect requires further validation through alternative models.
These findings contribute to Islamic banking literature by identifying NPF as a crucial link between financing risks and bank profitability.
The study emphasizes the importance of managing ijarah and mudharabah contracts carefully to enhance the financial resilience and sustainability of Islamic banks, especially in the post-pandemic recovery phase.
Keywords:
Bank financial performance.
Ijarah.
Mudharabah.
NPF.
Sharia Banks DOI: 1 28918/ijibec.
JEL: G21.
G24.
G32.
International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 Introduction Islamic commercial banking in Indonesia has witnessed substantial growth in recent years, marked by a consistent expansion in market share and asset base.
According to the Indonesian Financial Services Authority (OJK), as of March 2024.
Islamic commercial banks 38% of the national banking market, supported by an asset growth rate of 71%, bringing total assets to approximately IDR 900 trillion (Saputra & Ratnawati, 2.
This upward trajectory underscores the increasing significance of Islamic banking within IndonesiaAos financial system.
However, this expansion is accompanied by critical challenges, particularly in sustaining return on assets (ROA) amid rising credit default risks and problematic financing.
As Islamic banks extend greater volumes of financing, the nonperforming financing (NPF) ratio emerges as a pivotal indicator of financial health and risk NPF serves as both a diagnostic tool for assessing credit quality and a determinant of financial resilience.
An elevated NPF ratio indicates heightened credit risk, potentially eroding profitability and solvency.
Given that Islamic banks operate on financing contracts rather than interest-based lending, the quality of these contracts plays a crucial role in shaping financial performance.
Between 2020 and 2023.
OJK data revealed fluctuations in total financing and NPF levels, underscoring the necessity for robust credit risk management As financing portfolios expand, mitigating NPF risk is imperative not only for preserving ROA but also for ensuring long-term institutional stability.
Table 1 presents the progression of total financing and NPF over the specified period, illustrating the intricate relationship between financing quality and bank performance.
Table 1.
Total Financing and NPF of Sharias Banks in Indonesia (In Billio.
Year Total Financing Total NPF Source: OJK These figures highlight the dynamic and sometimes volatile nature of NPF, which is closely linked to debtorsAo ability to meet their financing obligations.
Addressing this challenge requires comprehensive policies and proactive monitoring of financing activities.
Scholars such as Jatmiko et al.
emphasize that NPF serves as a crucial benchmark for evaluating Islamic banking performance.
Understanding the determinants and consequences of NPF is essential for ensuring financial sustainability, particularly given the increasingly complex financing structures and associated risk exposures.
Within Islamic banking operations, mudharabah and ijarah represent two fundamental financing instruments, each with distinct risk-return profiles.
Mudharabah, a profit-sharing contract, inherently carries higher uncertainty due to the absence of collateral, while ijarah, a lease-based contract, offers greater asset control for the bank.
These financing modes not only influence income generation but also contribute differently to NPF levels.
Empirical studies by Choiriyah & Fitria .
Edriyanti .
, and Mutiah et .
confirm that NPF significantly affects ROA.
Additionally.
Shalsabila et al.
argue that elevated NPF ratios undermine bank value by impairing profitability, negatively influencing share prices, and weakening investor confidence.
In Islamic banking, where financing constitutes the primary revenue stream, excessive NPF can disrupt liquidity and hinder institutional growth.
Aligned with the profitability framework, this study conceptualizes ROA as a key International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 financial performance metric, reflecting both operational efficiency and institutional The volume and quality of financing extended by banks directly impact ROA, with mismanaged financing leading to impaired earnings and effective allocation fostering By examining the effects of mudharabah and ijarah financing on ROAAiboth directly and through the mediating role of NPFAithis study aims to provide a comprehensive understanding of how Islamic financial institutions navigate profitability within high-risk The integrative model employed herein seeks to elucidate the extent to which financing types affect ROA through credit performance dynamics.
Building upon this discussion, the study aims to address five central research questions: .
To what extent does mudharabah financing influence NPF? .
What is the effect of ijarah financing on NPF? .
How does mudharabah financing affect ROA? .
What is the relationship between ijarah financing and ROA? .
To what extent does NPF mediate the relationship between mudharabah and ijarah financing and the ROA of Islamic commercial banks in Indonesia? Addressing these questions not only fills critical gaps in existing Islamic finance literature but also offers practical insights into credit risk management and strategic financing decisions in Islamic banking.
This study posits that distinct financing instruments within the Islamic banking model entail varying implications for risk and profitability.
Mudharabah, due to its profit-and-loss sharing nature, is inherently more susceptible to default risk, thereby increasing NPF.
Conversely, ijarah enables banks to retain asset ownership, reducing loss exposure and moderating its impact on NPF.
These dynamics necessitate a comprehensive analytical framework to assess the mediating effect of NPF between financing modes and ROA.
Drawing on statistical data from OJK and existing empirical findings, the study formulates six testable hypotheses to establish a causal link between financing instruments.
NPF levels, and financial performance indicators.
Understanding this causal mechanism is crucial for balancing financing portfolio expansion with institutional profitability.
The broader implications of this study are significant.
It contributes to Islamic banking theory by clarifying the interactions between financing types, credit risk, and profitabilityAi an often-overlooked nexus in mainstream financial discourse.
Furthermore, it offers actionable recommendations for policymakers, regulators, and banking practitioners to develop adaptive risk mitigation strategies, optimize capital allocation, and innovate financial products.
As IndonesiaAos Islamic financial sector continues expanding within a dual banking system, insights from this study are expected to inform the development of more robust institutional frameworks, thereby enhancing the credibility, stability, and global competitiveness of Islamic commercial banks.
Methods This study investigates the relationship between Islamic financing products and financial performance in Indonesian Islamic commercial banks (ICB.
, emphasizing the mediating role of non-performing financing (NPF).
The analysis focuses on all ICBs under the supervision of the Financial Services Authority (Otoritas Jasa Keuangan, or OJK) during the 2021Ae2023 This timeframe is critical as it captures the post-pandemic recovery phase, a period characterized by liquidity constraints and heightened risk exposure.
The selection of ICBs as the unit of analysis is justified by their pivotal role in IndonesiaAos Islamic finance sector, serving as primary drivers of asset accumulation and financing distribution.
ICBs were chosen for their representativeness in reflecting broader industry trends.
principal institutions within IndonesiaAos Islamic financial ecosystem, their performance provides valuable insights into financing behavior, risk exposure, and profitability.
The study focuses on NPF, return on assets (ROA), and two primary Islamic financing modelsAi International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 mudharabah and ijarahAigiven their significance in risk-sharing frameworks and their direct implications for financial stability.
Examining these variables within the ICB context enables a comprehensive understanding of the mechanisms shaping Islamic financial Financial data were sourced from publicly available reports and official statistics, with rigorous filtering to ensure representativeness, consistency, and robustness across institutions and timeframes.
A quantitative research approach with a causal-explanatory design was employed to assess the direct and indirect effects of financing mechanisms on the financial performance of Indonesian ICBs.
A time-series method was selected to capture the dynamic and temporal fluctuations of financial indicators from 2021 to 2023.
The causal relationships were modeled using path analysis, which allows for the simultaneous assessment of multiple interrelated variables and the identification of mediation effects.
This methodological approach is well-suited to the studyAos objectives, as structured and measurable financial data facilitate rigorous statistical validation.
Path analysis is particularly appropriate for capturing the complexity of interactions among independent variables .
udharabah and ijarah financin.
, a mediating variable (NPF), and a dependent variable (ROA).
By leveraging this technique, the study provides a nuanced understanding of how financing mechanisms interact over time, which is crucial in Islamic banking, where profit-and-loss sharing principles supersede conventional interest-based financial models.
Empirical implementation involved the use of secondary financial data from two key sources: .
annual and quarterly financial statements of ICBs available on the Indonesia Stock Exchange (IDX) and .
Islamic banking statistics published by OJK for the 2021Ae2023 These sources are regarded as authoritative within IndonesiaAos financial regulatory framework, providing reliable, audited, and comprehensive data on financial performance and portfolio structures.
The reliance on secondary data is justified by the nature of financial indicators, which are best analyzed through official records rather than primary data collection methods such as surveys or interviews.
The longitudinal nature of the dataset allows for cross-year comparisons, strengthening the studyAos ability to establish causal inferences and detect performance trends.
Data processing and analysis were conducted using IBM AMOS version 22, enabling structural equation modeling to assess variable relationships, model fit, and statistical Standard diagnostic testsAiincluding assessments for normality, multicollinearity, and model fitnessAiwere applied to ensure the robustness and reliability of the analytical framework.
The integration of OJK and IDX data ensures that financing distribution, risk exposure, and profitability measurements align with regulatory definitions and industry standards.
The data collection process involved the systematic retrieval, validation, and consolidation of financial indicators, including total mudharabah and ijarah financing, total assets, net income, and NPF figures.
To ensure consistency and reliability, all data were standardized in terms of currency, reporting period, and accounting conventions.
Only ICBs with complete datasets spanning the three-year period .
1Ae2.
were included in the analysis to maintain internal validity and minimize biases resulting from missing data.
A structured document analysis approach was employed to collect data, wherein financial reports and banking statistics were electronically obtained from official sources such as the IDX and OJK.
These reports were meticulously examined to extract relevant variables, which were then compiled into a standardized matrix for subsequent quantitative This methodological approach is particularly suited to financial research, as it relies on publicly available and standardized data, thereby mitigating the risk of subjective International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 bias inherent in qualitative methods.
By utilizing document analysis, this study ensures traceability, transparency, and replicabilityAiessential attributes of empirical banking The data collection process followed a structured sequence: .
identifying Islamic commercial banks listed and registered between 2021 and 2023, .
extracting relevant indicators for mudharabah, ijarah.
NPF, and ROA, .
validating data consistency and removing statistical outliers, and .
standardizing measurement units for statistical analysis.
All datasets were archived with source documentation to facilitate verification and auditing.
The operationalization of the variables is as follows:
Mudharabah Financing: Defined as the total mudharabah financing extended by Islamic commercial banks registered with the OJK.
Ijarah Financing: Represented by the total final balance of ijarah financing over the period 2021Ae2023.
Non-Performing Financing (NPF): The NPF ratio was calculated as follows:
ycAycEya = ycNycuycycayco ycAycEyaycu 100% ycNycuycycayco yaycyceyccycnyc Return on Assets (ROA): Proxied by ROA, which was determined using the formula:
ycAyceyc yaycuycaycuycoyce ycIycCya = ycu 100% yaycyceyciycaycyce ycNycuycycayco yaycycyceyc The conceptual framework guiding this research is illustrated in Figure 1.
Figure 1.
Framework of Research The study tests the following hypotheses:
H0: p = 0, indicating no effect of mudharabah financing on NPF.
H1: p> 0, indicating that mudharabah financing has a significant effect on NPF.
H0: p = 0, indicating no effect of ijarah financing on NPF.
H2: p> 0, indicating that ijarah financing has a significant effect on NPF.
H0: p = 0, indicating no effect of mudharabah financing on ROA.
H3: p> 0, indicating that mudharabah financing has a significant effect on ROA.
H0: p = 0, indicating no effect of ijarah financing on ROA.
H4: p> 0, indicating that ijarah financing has a significant effect on ROA.
H0: p = 0, indicating no mediating effect of NPF on ROA.
H5: p> 0, indicating that NPF mediates the relationship between Islamic financing and ROA.
International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 The study employs path analysis using IBM AMOS version 22 to assess both direct and indirect relationships among the variables.
Path analysis is particularly suited for evaluating mediation effects, making it an ideal method for investigating NPFAos role as an intermediary between Islamic financing and profitability.
This technique enables the decomposition of total effects into direct and indirect components, allowing for the simultaneous testing of multiple hypotheses within a single structural model.
The choice of path analysis is justified by its ability to handle complex causal structures and latent relationships, providing a comprehensive understanding of financial performance dynamics within Islamic banking.
ensure robustness, statistical assumptions were verified through normality testing (Kolmogorov-Smirnov tes.
, multicollinearity assessment .
ariance inflation factor.
VIF), and model fit evaluation using indices such as the root mean square error of approximation (RMSEA) and chi-square test.
The analysis followed a structured three-stage approach: .
model specification, namely developing the analytical framework based on theoretical and empirical foundations.
estimation of standardized regression weights, namely assessing the strength and significance of variable relationships.
interpretation of effects, namely analyzing direct, indirect, and total effects with reference to critical ratio values and p-values.
The final model offers empirical insights into how Islamic financing instruments influence ROA, both directly and through NPF as a mediating variable, thereby contributing to the broader discourse on Islamic banking performance and risk management.
Results and Discussion Results Normality Test
Mudharabah
Ijarah
NPF
ROA
Table 2.
Test of Normality Kolmogorov-Smirnov Shapiro-Wilk Statistic Sig Statistic Sig Sources: Data processed In this study, the Kolmogorov-Smirnov test was employed to assess data normality.
significance value greater than 0.
05, as shown in Table 2, indicates that the data is normally Multicollinearity Test Multicollinearity was assessed using the variance inflation factor (VIF).
The criterion for no multicollinearity is a tolerance value greater than 0.
10, which corresponds to a VIF value The results, presented in Table 3, confirm that multicollinearity is not present in the dataset.
International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 Table 3.
Multicollinearity test
Collinearity Statistics Model
Tolerance VIF
Mudharabah
Ijarah
NPF
Dependent Variable ROA The Goodness-of-Fit (GOF) Test The root mean square error of approximation (RMSEA) index is used to compensate for the chi-square statistic in large samples.
An RMSEA value below 0.
05 indicates a well-fitting model, while values above 0.
08 suggest poor fit.
Table 4.
RMSEA
Model
RMSEA
LO 90
HI 90
PCLOSE
Default model Independence The RMSEA value of 0.
771, exceeding 0.
08, suggests that the model does not achieve a good fit.
Furthermore, the chi-square value of 21.
783 indicates that the model does not adequately fit the data, as a lower chi-square value is preferable.
However, the model remains appropriate for hypothesis testing since its primary objective is to establish a causal framework encompassing all observed variables.
Consequently, there is no need to exclude exogenous variables with non-significant path coefficients (Roflin, 2.
Hypothesis Testing Results Estimates (Group number 1 - Default mode.
Scalar Estimates (Group number 1 - Default mode.
Maximum Likelihood Estimates Regression Weights: (Group number 1 - Default mode.
Table 5.
Hypothesis testing results Estimate Label
NPF
<---
Mudharabah
NPF
<---
Ijarah
***
ROA
<---
NPF
***
ROA
<---
Mudharabah
ROA
<---
Ijarah
***
Standardized Regression Weights: (Group number 1 - Default mode.
Estimate NPF
<---
Mudharabah
NPF
<---
Ijarah International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181
ROA
<---
NPF
ROA
<---
Mudharabah
ROA
<---
Ijarah Based on these regression weight estimates, the effects of ijarah financing on NPF.
NPF on ROA, and ijarah financing on ROA are statistically significant.
Conversely, mudharabah financing's effects on NPF and ROA are not significant, as indicated by p-values of 0.
091, respectively.
Path Analysis Equations The relationships among variables were assessed using the following structural Sub-Structural Equation 1:
ycs = A A yce1 yc1ycu1 yc1ycu2 Sub-Structural Equation 2:
ycU = A A A yce2 yc2yc1 yc2ycu1 yc1ycu2 Description:
X1 = Mudharabah Financing X2 = Ijarah Financing Z = NPF Y = ROA Based on the analysis of Standardized Regression Weights, the following structural equation models emerge:
Sub-Structural Equation 1 as follows Z = 181 *X1 -0.
823 *X2
Sub-Structural Equation 2 as follows Y = 0.
710*X1 -0.
770*X2 -1.
Figure 2.
Framework of Research Results International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 Discussion The effect of mudharabah financing on NPF Mudharabah financing is inherently risky for Islamic commercial banks as it depends on the borrower's ability to fulfill their financial obligations.
Consequently, this type of financing has the potential to contribute to bad debts or NPF.
As indicated in the table above, the path coefficient for the effect of mudharabah financing on NPF is 0.
However, based on the pvalue, this effect is not statistically significant.
To determine whether an effect exists, the calculated critical ratio (Cr coun.
is compared to the critical ratio table value (Cr tabl.
Cr count > Cr table, an effect is present.
In this study.
Cr count .
exceeds Cr table .
, indicating that mudharabah financing affects NPF, albeit insignificantly.
The positive relationship between mudharabah financing and NPF suggests that higher mudharabah financing levels correspond to increased NPF.
These findings align with Hutagalung .
, who observed an insignificant negative relationship between NPF and mudharabah financing.
However, the key distinction in this study is that the relationship direction is positive.
The positive yet insignificant effect of mudharabah financing on NPF may be attributable to banks' ability to mitigate NPF through alternative revenue-generating activities outside of mudharabah financing, such as maximizing fee-based income.
By diversifying income sources.
Islamic commercial banks in Indonesia can minimize the impact of high NPF levels.
The effect of ijarah financing on NPF Ijarah financing exhibits a significant negative effect on NPF, indicating that an increase in ijarah financing is associated with a decrease in NPF.
These findings are consistent with the studies conducted by Hutagalung .
and Alfionita et al.
, which similarly concluded that ijarah financing reduces NPF levels.
The impact of mudharabah financing on ROA Mudharabah financing influences ROA, as evidenced by the calculated Cr value .
which exceeds the Cr table value .
Despite the positive direction of influence, the pvalue indicates that the effect is statistically insignificant.
This suggests that while mudharabah financing affects ROA, the magnitude of the impact is minimal.
These results align with prior studies, including those by Fikri & Wirman .
Pratama et al.
, and Widianengsih et al.
, which found that mudharabah financing partially influences profitability positively.
Similarly.
Widanti & Wirman .
reported that mudharabah financing positively impacted profitability (ROA) in Islamic commercial banks during the 2016Ae2020 period, implying that continued growth in mudharabah financing may enhance However, these findings contrast with those of Wilda et al.
, who found that mudharabah financing exerted a negative and significant partial effect on ROA.
Additionally.
Firdayati & Canggih .
and Sari & Nuraini .
concluded that mudharabah financing does not significantly impact ROA.
International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 The impact of ijarah financing on ROA Ijarah financing significantly affects ROA, but in an inverse direction.
This finding is consistent with the research conducted by Umiyarzi et al.
and Widanti and Wirman .
, both of whom reported a negative relationship between ijarah financing and profitability (ROA) in Indonesian Islamic commercial banks.
The results indicate that an increase in ijarah financing corresponds to a decline in ROA.
In contrast.
Pratama et al.
found that ijarah financing (X.
positively and significantly influences profitability (Y).
Similarly.
Nisra & Saharuddin .
reported that ijarah financing does not affect ROA.
These discrepancies may stem from variations in the number of financing customers utilizing ijarah contracts across different research samples.
Some Islamic commercial banks may have a high volume of ijarah customers, while others may issue ijarah financing less frequently, leading to differing effects on ROA.
The negative impact of ijarah financing on ROA in this study suggests that Islamic commercial banks registered with the Indonesian Financial Services Authority may experience problematic financing related to ijarah contracts.
This issue could be attributed to the financial downturn caused by the COVID-19 pandemic in 2020, which resulted in reduced payment capabilities among ijarah financing customers due to lockdown measures in various regions.
The mediating role of NPF between mudharabah and ijarah financing on ROA This study confirms that NPF significantly affects ROA in a negative direction.
These findings are consistent with prior research conducted by Azhar & Nasim .
Riyadi & Yulianto .
, and Suryadi .
The negative correlation between NPF and ROA implies that high NPF levels lead to reduced income, which, in turn, decreases ROA.
Conversely, lower NPF levels contribute to higher ROA.
These results also support the studies of Choiriyah and Fitria .
Edriyanti .
, and Mutiah et al.
Coefficient of determination Table 6 R square result Squared Multiple Correlations: (Group number 1 - Default mode.
Estimate ROA As indicated in the table above, the mediating effect of NPF on the relationship between mudharabah and ijarah financing and ROA is 0.
475, suggesting that NPF accounts 5% .
ounded to 48%) of the variation in ROA.
The remaining 52% is influenced by other unexamined variables.
These findings underscore the substantial role of NPF in mediating the effects of mudharabah and ijarah financing on profitability in Indonesian Islamic commercial banks.
Conclusion This study has elucidated the complex relationship between Islamic financing instruments and the financial performance of Islamic commercial banks in Indonesia.
The findings indicate that while mudharabah financing exhibits a positive but statistically insignificant effect on both Non-Performing Financing (NPF) and Return on Assets (ROA), ijarah financing exerts a significant negative impact on both NPF and ROA.
Furthermore.
NPF has been confirmed as a key mediating variable, exerting a significant negative influence on ROA, thereby underscoring the critical role of financing quality in sustaining bank profitability.
International Journal of Islamic Business and Economics (IJIBEC), 8.
December 2024, 169-181 These results suggest that the ability of mudharabah and ijarah financing to enhance ROA is contingent upon effective risk mitigation, particularly in maintaining low NPF levels.
This study contributes to the existing body of knowledge by establishing NPF as a pivotal mediating mechanism in the relationship between Islamic financing contracts and bank performance.
This contribution is particularly relevant in the post-pandemic context, where the financial resilience and sustainability of Islamic banks remain pressing concerns.
The findings reinforce theoretical frameworks linking risk exposure and profitability within Islamic banking and provide empirical validation that the success of profit-sharing mechanisms such as mudharabah and leasing-based schemes like ijarah depends significantly on the banks' capacity to manage credit risk effectively.
These insights are valuable for regulators, practitioners, and investors seeking to enhance the stability of Islamic banking in emerging economies.
Despite its contributions, this study is subject to certain limitations.
The reliance on a short time horizon .
1Ae2.
may constrain the generalizability of the findings across broader economic cycles.
Additionally, the study focuses solely on mudharabah and ijarah financing, excluding other critical Islamic financing contracts such as musyarakah and Future research should broaden the scope to encompass a wider range of Islamic financing instruments, extend the observation period, and incorporate comparative analyses across regions or bank classifications.
Moreover, a deeper examination of institutional governance and debtor profiling could yield richer insights into the causal pathways between financing structures and bank profitability in Islamic financial institutions.
Acknowledgment The author gratefully acknowledges the Financial Services Authority (OJK) and Islamic commercial banks in Indonesia for providing the data essential to this research, as well as colleagues and peers for their constructive feedback and support throughout the study.
References