DO DIVERSIFICATION EFFECT FINANCING RISK IN INDONESIAN ISLAMIC BANK’S: AN ARDL APPROACH

Sururi Sururi, Slamet Haryono

Abstract


This study aims to investigate the impact of financing diversification (FDV), income diversification (IDV), and other factors on financing risk (NPF) in Islamic banking in Indonesia. The study uses monthly time series data from 2016 to March 2024. Using the ARDL approach, the results show that financing diversification and income diversification do not significantly affect NPF. However, these findings are consistent with the argument that when banks diversify their loan portfolios, problematic financing will decrease.Moreover, bank-specific factors such as asset quality (AQ) can increase problematic financing in Islamic banking. Capital ratio (CAP), efficiency (OPE), and bank size (SIZE) do not have a significant impact on financing risk. In contrast, diversification (DIV) shows a significant positive effect on NPF both in the short and long term, meaning that when banks launch new non-interest income diversification businesses, financing risk increases. From the macroeconomic perspective, inflation (INF) has a significant positive effect in both the short and long term, indicating that as inflation worsens, the ability of customers to meet their debt obligations deteriorates. On the other hand, the BI rate (BRT) has a significant negative impact on NPF both in the short and long term. The findings of this study provide a significant contribution to the literature on the determinants of NPF and offer insights into the role of diversification. Islamic banks need to mitigate financing risks arising from the diversification of PLS and non-PLS contract products. Additionally, it is important for banks to maintain public trust by enhancing their credibility and existence as intermediary institutions, focusing on diversified products, maintaining asset quality, and considering the impacting macroeconomic factors.

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