Islam Bank Kredit

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Islamic LC confirmation operates on the principles of Kafalah. The product is essentially a guarantee by the Bank (the confirming bank) to make payment of an LC which has been opened by some other Bank (the issuing bank) upon failure of the issuing Bank to honour its commitment under the LC

Islam Bank Kredit

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Islamic banking is a system of conducting banking activities in line with the principles of Shariah while avoiding all the prohibited activities such as

Interest/Riba, Gharar* (uncertainty), dealing in prohibited businesses (e.g. alcohol, gambling), etc.

The teachings of Islam are meant for both Muslims and non-Muslims. Universal values like honesty, justice, avoiding fraud, etc., form the basic principles of Islamic banking. Therefore, Islamic banking is for everyone irrespective of what religion they follow. Furthermore, it increases the growth of an economic system.

As we all know, the Islamic banking industry is in its initial development stage. Ideally, Islamic banks should have their own KIBOR equivalent benchmark system. However, the nature/structure of the transaction determines its validity and using an interest rate benchmark for determining the profit of any permissible transaction does not render the transaction as invalid or Haram.

The same example can be used for Islamic and conventional banking as well. Making a transaction valid or Halal will depend on the process and sequence of transactions and not the end result. Hence, on face value, Islamic banks may look similar to conventional banks, but the contracts and product structures used by Islamic banks are different from conventional banks.

Emirates Islamic Debit Card combines the flexibility of cash with the security. You will enjoy acceptance at over 30 million merchants worldwide, make banking transactions using the largest global ATM network and use it for online shopping.

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Priyadi, U., Utami, K.D.S., Muhammad, R. and Nugraheni, P. (2021), "Determinants of credit risk of Indonesian Sharah rural banks", ISRA International Journal of Islamic Finance, Vol. 13 No. 3, pp. 284-301. -09-2019-0134

Credit risk, which is often represented by nonperforming loans (NPLs) for conventional banks, is an important component in economic stability. According to Endut et al. (2013), NPLs were related to the Asian financial crisis of 2007 and the collapse of financial markets. As a result, NPLs became an important issue and continue to represent a challenge that financial institutions have to manage (Endut et al., 2013). Islamic banks also face the issue of credit risk, in particular, that of nonperforming financing (NPF). According to Al-Wesabi and Ahmad (2013), bad management of credit risk is the cause of failure of three quarters of Islamic banks. One of the reasons is due to limited knowledge about the dynamics of credit risk. Therefore, an adequate understanding of credit risk will lead to a more stable financial system (Adebola et al., 2011).

In Indonesia, credit risk in Islamic banks must be given special attention because the banks face a high level of NPF. Bank Indonesia (the central bank of Indonesia) requires the maximum level of NPL for the banking industry to be 5% (FSA, 2013). However, based on statistics issued by the Financial Services Authority (FSA), the NPF of Sharah rural banks (SRBs) stood at 8.28% as at October 2019. SRBs are Islamic banks which provide services especially to the micro sector. There are 57.89 million business units in Indonesia, and the majority of them (99.9%) are micro, small and medium enterprises (MSMEs) (FSA, 2019). Many MSMEs do not have access to banking services (KNKS, 2019). The existence of SRBs is expected to strengthen the economic activity of the society, especially in rural areas where MSMEs face many difficulties in accessing business capital (Amelia and Fauziah, 2017). The FSA of Indonesia (2019) released the financing distribution and NPF ratio of SRBs.

NPL and NPF can be affected by several factors, both internal and external. Previous studies enumerated the internal factors influencing credit risk in the banking industry, specifically NPLs, such as financial ratio and bank characteristics (Suryanto, 2015; Effendi et al., 2017) and external factors such as interest rate, inflation rate and gross domestic product (GDP) (Adebola et al., 2011; Endut et al., 2013; Widarjono and Rudatin, 2021). Many studies also examined the internal and external factors influencing NPF, with varying results among studies (Firmansyah, 2014; Havidz and Setiawan, 2015; Supriani and Sudarsono, 2018).

Nonetheless, according to Nugrohowati and Bimo (2019), SRBs face major challenges, among others, a high level of competition and the need to control risks, especially credit risk. Competition between SRBs and Islamic commercial banks occurs because the government requires the latter to also provide financing to MSMEs. Because of this competition, SRBs may be motivated to simplify the financing procedures, which if not monitored carefully, can increase the risk of bad financing (Nugrohowati and Bimo, 2019). Still, SRBs should be aware of the high percentage of NPF among SMEs. According to KNKS (2019), the financing distributed by SRBs amounted to IDR4.55tn (US$325m) for SMEs and IDR5.52tn (US$394m) for non-SMEs as at September 2019; and the NPF of SMEs has been significantly higher than the NPF of non-SMEs over the recent period, according to data published by FSA (2019).

NPF represents a tool to measure financing risks. Banking performance can be evaluated by measuring the level of NPF/NPLs to indicate liquidity, profitability and solvability ratios (Dwihandayani, 2016). Isaev and Masih (2017) argue that NPF plays a key role in determining the quality and performance of banks because financing is the main function of banks in contributing to economic development. Islamic banks need to specifically manage their NPF level because it will have an impact on their performance in competing with conventional banks (Nugraheni and Muhammad, 2019).

A similar finding by Damanhur et al. (2017) is that increased production of goods and services as an indicator of good economic growth would reduce financing problems. Adebola et al. (2011) explain the long-term negative relationship between NPF and interest rate. In a period of high interest rates, the equivalent rate charged to seekers of Islamic financing will increase, as Islamic banks usually refer to the interest rate to determine their financing rates (Hasna et al., 2019). A high equivalent rate will reduce the intention of customers to apply for financing. Consequently, the number of customers who receive financing will be less. This can reduce the volume of financing and the level of financing risk so that the NPF level will also have the potential to decrease.

In the context of Indonesia, Damanhur et al. (2017) studied the determinant of NPF in branches of Sharah regional banks in Aceh and found that inflation and total assets influence NPF, whereas FDR has no significant effects on those banks. Supriani and Sudarsono (2018) also studied the influence of micro and macro variables on NPF in the context of Islamic banking in Indonesia. The study found that CAR, FDR and OER have a positive influence on NPF, whereas ROA, rate of Bank Indonesia (BI rate) and exchange rate do not influence NPF in the long term. In the short term, different results were found, notably that FDR, ROA, OER and BI rate have a positive effect on NPF, whereas exchange rate and inflation have a negative influence on NPF. Soekapdjo et al. (2018) further studied the influence of macro and micro variables on the bad debt of Indonesian Islamic banks. The study found that OER, exchange rate and GDP have a positive influence; inflation has a negative influence, whereas FDR and CAR do not influence NPF in Indonesian Islamic banks. Widarjono and Rudatin (2021), who examined NPF in Indonesian commercial Islamic banks and Islamic business units, found that operating efficiency and financing diversification had a positive effect, inflation had a negative effect, and CAR had no effect on NPF.

This study will examine the determinants of NPF using internal and external variables. The added value of this study is the addition of the dummy variable, FTV. Islamic banks can use FTV to determine the ratio policy of providing property financing. FTV is useful to maintain the bank prudence level when disbursing mortgage financing because it can increase the risk exposure if SRBs do not implement adequate prudential principles. Another value of this research is the use of ARDL to analyze the financial policies of SRBs, using data at the present time and lagged time. SRBs are very important for the Indonesian economy to distribute financing to SMEs; therefore, assessment of their financial performance is expected to encourage better management of the banks.

An increase in inflation may result in a decrease in bank income or profits, so that banks reduce their financing expansion when inflation occurs. The decline in financing growth will in turn lower the NPF level of Islamic banks.

Interest in daily banking activities can be divided into two types: interest on deposits and interest on loans. Deposit interest is interest given as a stimulus or remuneration to depositors of a bank. It is the price the bank must pay to its customers within the conventional banking set-up. Interest on loans is the interest or the price that must be paid by customers for the loans they borrow from the bank. Interest on loans and deposits is the main income and expense for the bank, respectively. 2351a5e196