Analysis of the Effect of Internal and External Factors on the Inefficiency Toward Profitability of Islamic Banking Industry in Indonesia

Abstract

Getting profits is the main goal of establishing a business entity, one of which is Islamic banking. One of the ways to increase the profitability of Islamic banking is efficiency. This study aims to examine the internal and external factors that affect Islamic banking industry inefficiencies which consist of internal factors, namely Non-Performing Finance (NPF) and bank size, as well as external factors, namely inflation, and the impact of Islamic banking inefficiency on the profitability of Islamic banking. Every bank needs to maintain a level of bank operational efficiency. Islamic banking needs to know how to control it so that bank operations remain efficient with the aim of banks being able to increase profits. The populations of this study are all Bank Umum Syariah (BUS) and Unit Usaha Syariah (UUS) in Indonesia. The sample used in this study is all BUS and UUS in Indonesia with research time limits of the period 2007-2018. The data analysis technique used is path analysis. The results of the analysis shown that Non Performing Finance (NPF), and bank size have a significant impact on Islamic banking inefficiency, and the results of data analysis show that inflation does not have a significant impact on Islamic banking inefficiency, and Islamic banking industry inefficiency has a negative and significant impact on profitability. The results of this study can be used as a consideration for the Islamic banking industry management to increase efficiency in bank operations, because of efficiency can be a positive signal to encourage increased profits earned by Islamic banking industry.