Financial Ratio Analysis and its Impact on Non Performing Financing in Indonesian Islamic Banks

Abstract

In Indonesia, substantial development has been experienced by Islamic banking, which has led to a considerable increase in Non-Performing Financing (NPF). Financing risks that cause problematic financing are contributed by internal factors within banks. Throughout the 2019– 2023 observation horizon, the Capital Adequacy Ratio (CAR) serves as the proxy for capitalization in an investigation designed to evaluate how the strength of capitalization influences Sharia banking entities operating within Indonesia. operational effectiveness represented by The ratio of non-performing financing (NPF) is examined in relation to the financing-to-deposit ratio (FDR), net operating margin (NOM), profitability represented by return on assets (ROA), as well as the operating expense-to-operating revenue ratio (BOPO). The analysis concentrates on Islamic commercial banking institutions that remained listed under the supervision of the Financial Services Authority (OJK), consistently published yearly financial statements, and engaged in financing activities throughout the period covered by the investigation in Indonesia. For the purpose of data processing, panel-data regression procedures operated through E-Views are employed, whereas the investigation adopts a quantitative research approach. The results indicate that ROA, CAR, and NOM significantly reduce NPF in the Islamic banking industry. In contrast, BOPO and FDR significantly increase NPF. These findings show that inefficient operations and unequal financing distribution raise the likelihood of non-performing financing, while capital strengthening, enhanced profitability, and optimized operating margins can reduce NPF in Indonesian Islamic banks.