An Empirical Re-Examination of the Islamic Banking Performance in Indonesia

Abstract This study empirically re-examines the effects of bank-specific and macroeconomic determinants on the profitability of nine Islamic banks in Indonesia during the period 20092015. Four specific bank variables (i.e., the size of the bank, adequacy capital ratio,concentration ratio, non-performing financing), and three macroeconomic variables (i.e.,economic growth, interest rate, and inflation) were, respectively, examined using the Generalised Least Squares (GLS) model. The study documented that the size of the bank, adequacy capital ratio, and economic growth positively contributed to the profitability of the Islamic banks. Meanwhile, the concentration ratio, interest rate, and inflation negatively influenced the profitability of the Islamic banks in the country. These findings implied that to enhance their profitability, the banks should increase their market shares and provide adequate capital ratio and run under the higher level of national economic growth. Additionally, ensuring the stability of interest rate and price level as well as promoting the awareness on the importance of having interest-free transaction for the Muslim via the Islamic banking institutions should be onsidered as strategic policies to promote the rofitability as well as enhance the competitiveness of the Islamic banks in the biggest Muslim populous country, Indonesia. Keywords: Performance; Banks’ Specific Characteristics, Macroeconomic Determinants, Islamic Banking Institutions, Generalized Least-Square, INDONESIA