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The Influence Of Financing Model And Credit Risk On Financial Stability(Study Of Islamic Rural Banks In Java Island)

Author

Listed:
  • Multazam Mansyur Addury

    (Institut Agama Islam Negeri Parepare, Indonesia)

  • Aprilia Kinasih Putri Ramadhani

    (Institut Agama Islam Al-Hikmah Tuban, Indonesia)

Abstract

This study examines the impact of profit-sharing financing and profit-margin financing on financial stability of Islamic Rural Banks (IRBs) in Java Island and incorporates credit risk as an intervening variable. Utilizing a panel dataset of 90 registered IRBs operating in Java Island from 2011 to 2021 and applying path analysis, we find that profit margin financing has a significant negative impact on the financial stability of IRBs, both directly and indirectly through its association with credit risk. In contrast, profit sharing financing shows a positive and significant direct effect on financial stability. This result implies that profit margin financing may pose a greater risk to the financial stability of IRBs than profit-sharing financing. The study highlights the need for IRBs to carefully manage their financing strategies, taking into consideration the potential risks associated with profit margin financing. Effective risk management practices are crucial for mitigating credit risk and ensuring the overall stability of IRBs. The research emphasizes the importance of a selective approach in providing profit-sharing financing to mitigate potential risks. It also underscores the significance of striking a balance between profitability and credit risk management to ensure the long-term stability of IRBs.

Suggested Citation

  • Multazam Mansyur Addury & Aprilia Kinasih Putri Ramadhani, 2024. "The Influence Of Financing Model And Credit Risk On Financial Stability(Study Of Islamic Rural Banks In Java Island)," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 10(3), pages 427-444, September.
    • Handle: RePEc:idn:jimfjn:v:10:y:2024:i:3a:p:427-444
    DOI: https://doi.org/10.21098/jimf.v10i3.1788
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    More about this item

    Keywords

    Profit-sharing financing; Profit margin financing; Financial stability; Islamic rural banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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