Factors Influencing the Operation of Shariah Banking in Indonesia

Abstract

Being the largest Muslim majority country in the world, Indonesia seeks to be the centre for Shariah banking. Its vision is to take Indonesia’s Islamic banks to the highest position in the ASEAN, without being deterred by challenges such as the economic crisis of 1998-99. The present examined different banking and environmental factors that made an impact on the efficiency of Islamic banks in Indonesia through panel data observed between 2002 and 2013. This study adopted the quantitative paradigm and analyzed secondary data obtained primarily from Bank Indonesia and 120 other Islamic (Sharia-compliant) banks in Indonesia. The research procedure involved identifying research variables and descriptive factors that affected the efficiency of Islamic Commercial Bank (BUS) in Indonesia. The analysis included a study of factors that affect BUS’s efficiency such as fixed effect and robust standard errors.  The results indicated that capital adequacy ratio, return on assets, return on equity and gross domestic product have a positive association with the banks' efficiency while non-performing loans, net interest margin, and inflation have a negative association with the efficiency of the banks. These findings are useful for regulators and lawmakers to formulate laws and regulations related to banks' efficiency and factors that enhance it.