The Impact of Macroeconomics Variables and Bank Internal Factors on Islamic Banking Performance During Covid-19 in Indonesia

Abstract

Previous studies focused on Bank internal factors in analysing the financial performance of Islamic banks. In this paper, we examine the performance of Islamic Banks in Indonesia by using key macroeconomics and bank internal variables as well as including covid-19 as a dummy variable from 2010 to 2021. The study used secondary data collected from World Bank database and Islamic banks annual financial reports. An Econometrics models such as VAR, unit root test and Johansen cointegration test were employed in the estimation process in which ROA was used as a proxy to measure the performance of Islamic Bank whereas Eight variables such as GDP, BOPO, CAR, FDR, NPF, Trade, Inflation, and Covid-19 were used in determining the performance of Islamic Banks in Indonesia. The findings indicate that, the lagged values of Gross Domestic Product (GDP), BOPO, CAR, FDR trade and Covid-19 all have a positive relationship with ROA. In the other hand, the lagged variable of Non-performing Financing (NPF) shows a negative and statistically insignificant relationship with ROA. Consequently, the study recommends that government should introduce expansionary fiscal policy to stimulate economic growth thereby enhancing Islamic banks performance. From this results, management of Islamic banks and those in academia can use it in understanding the macroeconomic and bank internal factors that impact the financial performance of Islamic banking. However, this paper could not examine other variables like digital index, taxation and banks governance structure in determining the financial performance of Islamic banks in Indonesia.