Determinants of Non-Performing Financing for Islamic Commercial Banks in Indonesia with a Dynamic Panel Data Approach

Studying Non-Performing Financing (NPF) factors in the Indonesian Islamic banking sector is crucial to mitigating credit risk. In this study, we used factor analysis to determine indicators of internal and external factors in Islamic banking, then used system GMM estimation techniques to examine the dynamic effect of internal and external factors on NPF with panel data set at 14 Islamic Commercial Banks and 20 Islamic Business Units in 33 provinces from 2015 to 2019. The empirical results show that internal factors are formed in two dimensions: the fundamental dimension (Assets, Financing, and TPF) and performance measurement consisting of ROA, CAR, and CIR. External factors consist of two indicators (inflation and SBIS). The current NPF performance is not affected by the previous year's NPF. Conversely, the NPF of Islamic banking can decrease if ROA performance increases more than CIR. Islamic banking needs to strengthen its internal performance through its ability to manage invested funds to generate profits and strengthen the performance of the financing monitoring team to mitigate credit risk.