NON-PERFORMING FINANCING AND BANK EFFICIENCY OF ISLAMIC BANKS IN INDONESIA

Abstract

This paper investigates the inter-temporal relationships between bank efficiency and non-performing financing (NPF) and the determinants of non-performing financing (NPF) of Islamic banks in Indonesia in the period of January 2007 – September 2012. This research uses time series and monthly-published report data of BPS-Statistics Indonesia. The Data Envelopment Analysis (DEA) approach is used to measure efficiency of Islamic banks. The inter-temporal relationships between bank efficiency and NPF is run using VAR model for time series to test the two hypotheses of four hypotheses that are introduced by Berger and deYoung (1997): ‘Bad Debt’ and ‘Bad Management’. The study examines the determinant variables: return on assets (ROA); financing debt ratio (FDR), inflation, interest rate and GDP of NPF. The finding shows that Islamic banks in Indonesia in the period of January 2007 – September 2012 tends to support the ‘bad management’ hypothesis. The finding implies that the increase of non-performing financing of the Islamic banks in Indonesia is mainly caused by poor management rather than external factors. This result is also indirectly supported by the determinant variables of non-performing financing (NPF), especially the bank-specific variables. ROA is the highest coefficient among the determinant variables used in this research that affect NPF and external variable: Inflation is the weakest coefficient that affect NPF. The bank-specific variables/internal variables that have more effect to NPF of Islamic banks in Indonesia compared to external variables may also be explained due to the small market share of Islamic banks’ assets in Indonesia, just around 3% compared to conventional banks’ total assets.