THE RELATIONSHIP BETWEEN HUMAN CAPITAL INVESTMENT, NON- PERFORMING FINANCING AND PROFITABILITY

Abstract

Purpose of the study: This research aims to identify the influence of good corporate governance (GCG) mechanisms and human capital investment (HCI) on non-performing financing (NPF) and profitability. In addition, we examine the relationship between NPF and profitability. Methodology: The research samples are commercial Islamic banks in Indonesia (13 banks) that were determined by using a purposive sampling method. The data are collected from the banks’ financial statements and GCG reports, from 2012 to 2016. Structural Equation Modeling (SEM) was employed to analyze the data. Main Findings: Our study shows that the number of directors a bank has significantly affected NPF but does not affect profitability, while the size of the independent Board of Commissioners (BoC) has a significant influence on NPF and profitability. Sharia Supervisory Board also has a role in improving profitability. HCI has a significant effect on profitability, but it does not affect NPF. Applications of this study: Islamic banks are urged to improve their implementation of GCG, especially for their ratio of independent commissioners and HCI expenditure. Independent commissioners and HCI are able to reduce the level of NPF and improve performance. HCI expenditure should be viewed as an investment by the bank, and not as a cost. Investment in HCI is proven to improve profitability. Novelty/Originality of this study: The use by researchers of the HCI variable to influence NPC is still limited. The reason is that the main source of a bank’s income is from financing (loans), so the highest risk for the bank is NPF. To reduce NPF, the bank’s employees must have the ability to manage risk.