Indonesia Conference Directory

The development of Islamic banks in Indonesia is quite rapid, but unfortunately the risk of non-performing financing (NPF) in Islamic banks is also great in number. This study aims at identifying determinant factors of NPF in the short- and long-run. To this end, quarterly financial statements of 13 Islamic Banks in Indonesia published by Indonesian financial services authority (OJK) from June 2014 to January 2018 are analyzed using error correction model (ECM). It is revealed that capital adequacy ratio (CAR) is the most contributing factor to NPF in the long-run. In the short-run, it is net operating margin (NOM) that contributed most to NPF. In order to minimize NPF risks, Islamic banks must diversify their assets into productive assets and not rely on profit sharing, but also from other income generating portfolios. Islamic Bank need to apply the four eyes principles to minimize the risk of NPF. It is necessary for Islamic banks to form special team tasked with financing analysis, proposal screening, proposal verification, and field checking.