Determinants of Islamic Rural Bank Financing in Indonesia

Abstract

This research is designed to empirically investigate the determinants of Islamic rural banking financing in Indonesia after 2008 global financial crisis covering period 2009.1-2014.12. The methods applied in this research are Error Correction Model (ECM) and VAR/VECM. The results of ECM model demonstrate that the variable third party funds (DPK) and non-performing financing can significantly affect Islamic rural banking financing both in the short run and long run, while Return on Asset (ROA) and Profit-and-loss sharing does not have a significant influence. Islamic rural bank financing, however, was influenced by inflation and exchange rate as the proxy of macroeconomic variables in the short and long run. Furthermore, Impulse Response Function (IRF) and variance decomposition results show that Profit-and-loss sharing (PLS) has the largest positive impact to financing (39.08%), followed by third party fund (19.6%) and inflation (8.9%). While, the variables that contribute to reduce financing are non-performing financing (9.02%), followed by ROA (7.76%) and exchange rate (2.48%).