Credit Risk, Capital Adequacy and Liquidity Dynamics: Evidence on Profitability from Indonesia

Abstract

This study aims to empirically investigate the impact of Non-Performing Financing (NPF), Capital Adequacy Ratio (CAR), and Financing to Deposit Ratio (FDR) on Return on Assets (ROA) in Islamic banks in Indonesia. The population of this study consists of Islamic banks registered with the Financial Services Authority (OJK), with the sample selected through a purposive sampling technique. This research utilizes secondary data in the form of quarterly financial reports from five Islamic banks over the period 2021–2024, resulting in a total of 80 observations.

The study employs panel data regression analysis using the Fixed Effect Model, complemented by White cross-section standard errors to ensure robustness. The results of the F-test reveal that NPF, CAR, and FDR simultaneously have a significant effect on ROA. Furthermore, the t-test results indicate that NPF and CAR individually exert a significant negative influence on ROA, whereas FDR shows a significant positive effect.

The adjusted R-squared value of 96.7% suggests that the model has a strong explanatory power in capturing the variation in profitability. These findings provide important insights for policymakers and bank management in formulating strategies to enhance the financial performance of Islamic banks in Indonesia.