Indonesia Conference Directory

Islamic banking in Indonesia has been growing rapidly since 2010. Based on the profitability, the Return of Asset (ROA) of Islamic banking during the 2011-2018 period was 1.47%. Based on the ROA, Islamic banking is classified as the healthy bank. The level of profit of Islamic banking, however, depends on the internal and external factors. The internal factors of the bank are such as from the financing ability, efficiency and non performing financing. While the external factors depend on macroeconomic conditions such as inflation and exchange rates. As a country with an open economy, macroeconomic conditions are very volatile. Through the theory of exchange rate pass through, exchange rate fluctuations affects domestic prices so that it affects the profits of Islamic banking. This study analyzes the impact of volatility of the macroeconomic variables, namely the exchange rate and inflation on the profitability of Islamic banking. The Exchange rate and inflation instability are measured using the GARCH (Generalized Autoregressive Conditional Heteroskedasticity). The study applied ARDL (Autoregressive Distributed Lag Model). The data used is monthly data starting from January 2011 to June 2018. The results of the study show that the exchange rate and inflation instability depress the profitability of Islamic banking.