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Determinants of Islamic Banking Performance: An Empirical Study in Indonesia

This study aimed to examine the effects of Capital Adequacy Ratio (CAR) and Good Corporate Governance (GCG) on Return On Asset (ROA) with Non-Performing Financing (NPF) as a moderating variable. The sample used in this study is 14 Islamic commercial banks listed on Bank Indonesia from 2014-2018. The sampling technique used in this research is purposive sampling with the type of data used in this research is panel data. To analyze the data, the researchers use a statistical test that includes classical assumption test, t-test, F-test, the coefficient of determination (R2), and Moderated Regression Analysis (MRA). The process of data analysis is using a means of IBM SPSS Statistics 23. The results of this study show that CAR has a negative and significant effect on ROA, and GCG does not have a substantial impact on ROA. This study indicates that NPF is unable to moderate the effect of CAR on ROA. However, NPF is significantly able to moderate the effect of GCG on ROA.


INTRODUCTION
According to the Financial Services Authority (Otoritas Jasa Keuangan/OJK) data in 2019, the total assets of Islamic banks in Indonesia only reach 5.85% of the total value of the entire national banking assets. The current development of the domestic Islamic banks is still far from the expectations. Several factors that delay the development of Islamic banks (including human resources) are inadequate (Hulu, 2019). Also, the lack of socialization of the bank to the public about the existence of Islamic banks.
The company's financial performance is closely related to measurement and assessment performance. Performing measurement is the qualification, efficiency, and effectiveness of the company in operating a business during the accounting period (Hanafi, 2007). According to Munawir (2012), the purpose of measuring the company's financial performance uses ROA is to know the level of liquidity, solvency, profitability, and stability.
Profitability measures a company's ability to earn profits in relation to sales, total assets, and its capital (Sartono, 2001;Mai, 2006). Profitability is related to investment. Measurement of profitability can use the rate of return from the investment (return on investment-ROI), or the rate of return on assets (ROA).
Capital Adequacy Ratio (CAR), can be calculated using a CAR ratio in which Bank Indonesia sets a CAR of 8% (Ali, 2006). The previous studies have contradictory results. So, it needs to conduct another research related to the factors affecting ROA. Pravasanti (2018), on her research, concludes that CAR has a positive and significant effect on ROA of Islamic banks.
The results of Harun (2016), and Kusumastuti and Alam (2019) reach contradictive conclusions. They find that CAR does not affect profitability or ROA.
To establish a functional and resilient Islamic banking industry, it requires the implementation of good corporate governance in the commercial banks and the Islamic Sharia Business Unit, and they also have to meet the principles of sharia consumers (in line with Islamic principles) (Bank Indonesia, 2009). Several previous research claims that the application of GCG can increase the reputation and public confidence of the Islamic bank (Hartutik & Asmita, 2016). Then, several studies done by Hisamudin and Tirta K (2012), Ghaffar (2014), andPrasojo (2015) show that GCG has a positive and significant impact on the financial performance of Islamic Banking. By the implementation of GCG, Islamic Banks' profitability is about to increase. However, the research by Permatasari and Novitasary (2014), Paul, Ebelechukwu, and Yakubu (2015), and Siswanti (2016), show that GCG does not affect the bank's performance.
The different and conflicting results require a moderated variable (Anthony & Govindarajan, 2007). The inconsistency of the previous results might be affected by Non-Performing Financing (NPF). It can be done by strengthening or weakening the relationship (moderation) between CAR and GCG on profitability (ROA). So, this research examines the

Capital Adequacy Ratio (CAR)
Capital Adequacy Ratio (CAR) is a capital ratio that explains the ability of banks to prepare funds for their business development purposes and anticipate the risk of loss of funds due to bank operations (Ali, 2004). In other words, the capital adequacy ratio is the bank's performance ratio to assess the level of bank capital adequacy for supporting assets that may have produce risks. Bank Indonesia determines if ROA > 1.22% is labelled as "good", 0.99 -1.22% (good enough), and < 0.77% (poor). The higher level of CAR makes the bank's ability to overcome the risk also getting higher (e.g., risky credit or productive risky assets) and the ability the bank to fund its operations. It means that the banks can provide a large contribution to banks' profitability (Kuncoro & Suhardjono, 2002). Primadewi and Suputra (2015) conclude that capital adequacy has a positive effect on the profitability of BPD Bali. Akhtar, Ali, and Sadaqat (2011) conclude that CAR has a positive effect on the profitability of the Islamic Banks of Pakistan. Singh (2015) concludes that capital adequacy has a positive effect on the profitability of banking companies in India. Also, Saputra and Budiasih (2016) conclude that the capital adequacy of banks has a positive effect on bank profitability. Capital adequacy will undoubtedly give effect to the profitability's enhancement of the company because the company can carry out its business operations without worrying about the risks that may arise. Merkusiwati (2007) on her research states that the high level of CAR will affect the level of profitability so that it can be a benchmark for investors and other interested parties to find whether the bank is right or not. The low level of CAR will undoubtedly decline the public's sight in banks, because of the little guarantee trust in the community. In other words, the lower the CAR grade, the more inefficient the bank will be. Also, the smaller funds of the bank will result in the lower bank's ability to maintain the risk of loss possibility, so that the bank's performance will undoubtedly decrease.

Good Corporate Governance (GCG)
Good corporate governance (GCG) in the banking industry is described as a relationship among the board of commissioners, the board of executive directors, stakeholders, and shareholders (Idroes, 2011). GCG is a set of regulations to direct, manage, and supervise the relationship between company managers and stakeholders in a company to increase the company's reputation. Companies that can improve GCG quality show an enhancement in their market valuations, while companies that have been faced GCG quality's declination seem to decrease in their market valuations (Cheung, 2011). GCG can create a supportive environment such as an efficient bank and alleviate financial risks. Creditors and other funders are more likely to provide finance when they feel comfortable enough with excellent corporate governance arrangements. Good corporate governance also increases organizational resilience and resilience of external shocks (Greuning & Bratanovic, 2011). The primary focus of corporate governance mechanisms is to design effective corporate control to assure executives act in the best interest of stakeholders (Awotundun, Kehinde, & Somoye, 2011). The implementation of good corporate governance has to maintain the company's business sustainability and maximize value for an extended period. Indonesia Financial Services Authority (OJK) believes that GCG can improve Board of Commissioners' role, Board of Directors' role, shareholder rights, material corporate transaction, disclosure and transparency, and also internal control. Therefore, these will increase investor confidence, reduce the cost of capital, and create sustainable company performance.

Non-Performing Financing (NPF)
The ratio that assesses the risky level of bank financing, whether it is clear or unclear, is All of these risks lead to non-performing financing. The problem of financing in a large number will affect a reduction in the bank's operating level. Then, low NPF means profitability will be high. According to the Bank Indonesia Regulation Number 14/15/PBI/2012 concerning the assessment of commercial bank asset quality article 12 number 3, credit quality is divided into: a). Current; b). Special mention; c). Sub Standard; d). Doubtful; and e). Loss.

Profitability
The extended probability of a company generates profits from sales and investment of the firm (Weston & Copeland, 2008). If the profitability of the firm is good, the stakeholders (creditors, suppliers, and investors) will see the extent to which the company can generate profits from sales and investment of the company. Suharli (2006) states that a good company's performance will also increase the value of the company. Profitability concerning investment connects profit with investment. Measurement is the return on investment (ROI), or the rate of return on assets (return on assets/ROA). However, an analyzed performance is ROA. The description of the size of gained net profit is the result of this ratio. It means that the decreased rate will affect net income. This analysis is used by many researchers to proxy the profitability of ROA. It is a tool that measures bank management's ability to obtain generated profits by the average of the total assets of the Bank (Almilia & Herdinigtyas, 2005). Profitability assesses a company's ability to get benefits in its trading with sales, total assets, and its funds.
According to Kasmir (2010), profitability is a ratio to assess a company's ability to seek profits and also provide a measurement of the effectiveness of a company's management. This ratio is the efficiency of the company because of the profits generated on sales and investment income. Profitability will assess income according to the income statement with the investment book value. The profitability ratio can be compared with a rate that is equal to the ratio of other corporations in the previous year or often referred to as the average industry ratio (Tampubolon, 2005). According to Horne and Wachowicz (2012), profitability is a relationship that occurs between profit and sales; and profit with investment; they become the indication for the effectiveness of the overall company's operation. While Sutrisno (2007), the measurement tool used in profitability is ROA through a comparison of net income after tax and total assets.
The application of ROA is useful because its essential to assess the effectiveness of generated profits gained by a company using company-own assets.

Profitability (Return on Assets/ROA)
Capital Adequacy Ratio (CAR), as one of the indicators, assesses bank's ability to cover declining assets due to bank losses and assets. This high ratio implies the financial capital of the bank's position will be better. Bank of International Settlement Standard (BIS) provides the minimum capital at 8% of risk-weighted assets (Kuncoro & Suhardjono, 2012). In the banking business, ROA is used to measure the ability of bank management to obtain profits (profit before tax), which is resulted from the total assets from the concerned bank (SE BI According to Kusima in Ristifani (2009), theoretically, good corporate governance practices can improve the company's performance and reduce the risk that may be carried out by the board with a beneficial decision. Further, good corporate governance, in general, can increase investor confidence to invest capital that impacts on financial performance. The essence of good corporate governance will economically maintain the business' continuity, profitability, and growth (Achmad, 2009). The results of studies from Hisamuddin and Tirta K (2012), Ghaffar (2014), and Prasojo (2015)

Governance (GCG) and Profitability (Return on Assets/ROA)
Non-Performing Financing (NPF) illustrates the ability of bank management to manage financial problems. The higher number of NPF results in the low quality of a bank's credit. Hasibuan (2006) states that the uncertainty of returned credit causes risky lending.
According to Wahyuningsih, Oemar, and Supriyanto (2015), NPL's effect comes from unsolved interest so that it influences ROA. Therefore, it empirically shows that NPF has a significant impact on the relationship between NPF and ROA. Then, the researchers  The average value (mean) of GCG is 2.12, with a minimum amount of 1, the maximum value is 3, and the standard deviation value is 0.536. These data indicate a significant difference between the lowest and highest GCG value, range from 1 to 3. The average value (mean) of NPF is 2.31, with a minimum amount of 0.00, the maximum value is 4.97, and the standard deviation value is 1.730. Another result shows the difference between the lowest and highest NPF values, which are between 0.00 and 4.97. This value indicates that the NPF has increased. Then, from table 1, it can be seen that the amount of the standard deviation is still below the average (mean) value of NPF (Mean> Std. Deviation). The data shows that data deviations are small, or there are no outlier data. In this, study NPF is used as a measurement of non-performing financing's level, which is calculated by dividing non-performing financing from the total financing issued by the Islamic commercial banks. The normality test in this study applies the one-sample Kolmogorov-Smirnov test. The significance level used is α = 0.05. If the probability value p ≥ 0.05, it indicates the normality's assumption is fulfilled. Moreover, the result of the normality test on table 2 shows the probability value on 0.208. It is more than 0.05. This means that the assumption of normality is fulfilled.    Setiawan (2017), and Munawaroh and Azwari (2019), they find that GCG does not affect the return on assets. However, the result of these studies contradicted the other studies found by Hisamuddin and Tirta K (2012), Ghaffar (2014), and Prasojo (2015), which show that GCG has a positive and significant effect on the financial performance of Islamic Banking.

Hypotheses 3 Test: The Role of Non-Performing Financing on the Relationship Between Capital Adequacy Ratio (CAR) and Return on Assets (ROA)
The result of the hypotheses test shows that Non-Performing Financing (NPF) has no significant and negative effect on the relationship between CAR and ROA. The value of the regression coefficient of CAR variable interaction with NPF has a coefficient value of -.002 with significancy level of 0.879 (more than 0.05). This result proves that NPF is unable to moderate the relationship between CAR and ROA. NPF does not weaken the link between CAR on profitability (ROA). So, empirically NPF is unable to play the role of the moderating variable on the relationship between CAR and ROA. As a result, hypotheses 3 is not accepted. This result is in line with the researches conducted by Ganggarani and Budiasih (2014), Taufik (2017), and Yusuf and Surjaatmadja (2018). It shows that NPF cannot significantly moderate the relationship between CAR on profitability (ROA). However, the result of this study is different from the studies done by Wahyuningsih et al. (2017), and Lestari (2019), which state that the ability of NPF to moderate the relationship between CAR on profitability (ROA).

Hypotheses 4 Test: The Role of Non-Performing Financing on the Relationship Between Good Corporate Governance (GCG) and Return on Assets (ROA)
The result of the hypotheses test shows that Good Corporate Governance (GCG) has a significant and negative effect on the relationship between GCG and ROA. The value of the regression coefficient of GCG variable interaction with NPF has a coefficient value of -1.429 with significancy level of 0.001, less than 0.05. This result proves that Non-Performing Financing (NPF) can moderate the relationship between GCG and ROA. This means that NPF significantly decreases the relationship between GCG and profitability (ROA). So empirically, NPF can play the role of moderating variable from the relationship between CAR and ROA. As a result, hypothesis 4 is accepted.

CONCLUSIONS
The result of this study shows that CAR, GCG, and NPF have a significant effect on ROA simultaneously. However, an independent CAR's variable has a substantial and negative impact on profitability (ROA) and GCG, and it does not have a significant and positive effect on ROA. It can be explained that when CAR has increased, it may not necessarily increase the profitability of Islamic banking in Indonesia. Therefore, this happens because the data shows that the Islamic commercial banks in Indonesia perform a high level of their CAR ratio. In fact, the banks' management has less ability to handle their risky problem. Therefore it will affect their profitability. The result of this study shows that NPF is unable to moderate the relationship between CAR and ROA. However, NPF can moderate the relationship between GCG and ROA.