Paper Title (use style: paper title) http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 1 The Impact of Non-Performing Financing (NPF) to Profitability (Return On Equity) at Sharia Bank in Indonesia *Lecture of Islamic Banking Department, Faculty Of Islamic Studies, Serambi Mekkah University, Indonesia muksal@serambimekkah.ac.id Abstract— - This study aims to analyze the effect of Non Performing Financing (NPF) on Profitability proxy with Return On Equity (ROE) variable of syariah bank in Indonesia period of 2013-2015. The sample population in this study were three banks with sample selection using purposive sampling technique with syariah bank criteria which published periodic financial statements during the observation period that is the period of 2013-2015. The research data is quantitative data obtained from the quarterly financial report of sharia bank. Data analysis using simple linear analysis with 5% significance level which aims to obtain how the overall influence of the relationship between NPF variable and Return on Equity (ROE). The results showed that the variable Non Performing Financing (NPF) has a negative and significant effect on Return On Equity (ROE) with a value t greater than 0.005. High NPF ratio in syariah bank can give a picture of the negative effect on profitability of sharia bank.. Keywords; Non Performing Financing, Profitability, Return On Equity, Syariah Banking I. INTRODUCTION The development of sharia banking in Indonesia is quite rapid and has a considerable opportunity, it was felt after the government and Bank Indonesia gave a big commitment by taking various policies to develop sharia banks. As of 2009, there have been six Sharia Commercial Banks (BUS), 25 Sharia Business Units (Sharia Division), 138 Sharia Rural Banks (BPRS) with a total of 1223 sharia banking offices spread throughout Indonesia. To be able to know the development of the number of sharia banking and banking offices in Indonesia for the last five years can be seen in the table below. TABLE 1 Development of Sharia Bank Type 2005 2006 2007 2008 2009 Sharia Commercial Banks  Total Bank 3 3 3 5 6  Total Office 304 349 401 581 711 Sharia Business Units  Total Bank 19 20 26 27 25  Total Office 154 183 196 241 287 Sharia Rural Banks  Total Bank 92 105 114 131 139  Total Office 92 105 185 202 225 Total Office 550 637 882 1024 1223 Source : Bank Indonesia One of the banking performance measurement ratios is profitability used to measure management effectiveness based on the results obtained from sales and investments. Profitability is the percentage comparison between profit with assets or capital that generate profit [4]. Banking in this case is required to increase profitability because profitability is one indicator to measure and evaluate the performance of bank management and productivity in managing banking assets as a whole, so with high profitability banks are expected to continue to run the business and improve its performance so that the community needs will be fulfilled. Profitability also indicates whether the business entity has a good prospect in the future, so the higher level of profitability of a business entity then the survival of the body will be more secure [9]. The commonly used indicator to measure the performance of bank profitability is Return On Equity (ROE). ROE according to Pramudhito [12] shows the ability of banks to manage available capital to obtain net income. The ROE standard according to PBI No.6 / 10 / PBI / 2004 is 5% -12.5%. The greater the ROE, the greater the level of profit earned by the bank that affects the better the bank's position in terms of capital management. The higher the return then the better because it means that the dividends are distributed or reinvested as retained earnings is also greater [11]. The health criteria of sharia banks stipulated by Bank Indonesia are as follows: TABLE 2 Non Performing Financing Rating Assessment Rating Value NPF Predicate 1 NPF<2% Very good Muksal* EJIF – European Journal of Islamic Finance No11, December (2018) http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 2 2 2%≤NPF≤5% Good 3 5%≤NPF≤ Pretty Good 4 8%≤NPF≤12% Not So Good 5 NPF≥12% Not Good Source : SE BI No. 9/24/DPBS October, 30, 2007 Non Performing Financing is a financial ratio that shows the total problematic financing in sharia banking. In conventional banking, the financial ratios that represent problematic financing are known as Non Performing Loans (NPLs). Non Performing Financing (NPF) measures the bank's ability to safeguard the risk of default on the return of debtors. The high level of Non Performing Financing (NPF) in a sharia bank shows the quality of an unhealthy Islamic bank. Non- current financing is due to constraints on each financing provided by the sharia bank. The constraint is caused by any financing provided by the bank, not all of the financing can be fully refunded by the customer. So that Non Performing Financing (NPF) has a negative effect on Return On Equity (ROE). This study was conducted to test whether Non Performing Financing (NPF) has an effect on profitability. Profitability is measured by Return On Equity (ROE) to determine the ability of management in managing the available capital to generate net income. This research is different with previous research is population, time, and sample used in this research is Sharia Bank in Indonesia period 2013-2015. II. LITERATURE REVIEW This study is based on the research of Dendawijaya [4] which suggests the impact of the existence of Non Performing Financing (NPF) which is not fair one of them is the loss of opportunity to obtain income from credit given, thus reducing the profit gain and adversely affect profitability. Non Performing Financing (NPF) the higher the profitability will be lower and vice versa, if the Non Performing Financing (NPF) the lower the profitability will be higher. As stated by Abdullah [5] "If the problem loans are very large and the reserves formed are also large, the bank's capital is likely to be negative so that the profit will be disturbed. Another study by Susilawati [6], which examines the effect of mudharabah financing on Non Performing Financing (NPF). In this research, the object studied is BPR Syariah Baiturridha Pusaka Bank. The result of this research indicates that there is influence of mudharabah financing to Non Performing Financing (NPF). Kharisma [8] examines about third party funds and Non Performing Financing (NPF) on profitability. This study concludes that simultaneously third party funds and Non Performing Financing (NPF) together have a significant effect on profitability. And partially there is a significant influence between third party funds on profitability and there is a non- significant influence between Non Performing Financing (NPF) on profitability. Mutaminah and Chasanah [7], this study examines external and internal analysis in determining Non Performing Financing (NPF) of Sharia Commercial Banks in Indonesia. The result of the research shows that GDP (Gross Domestic Product) has no significant positive effect on Non Performing Financing (NPF) of sharia bank, inflation has a significant negative effect on Non-Performing Financing (NPF) of sharia commercial bank, exchange rate or exchange have positive but not significant effect to the level of Non Performing Financing (NPF) ratio of sharia banks, profit return sharing return on total return is negatively insignificant to non-performing financing (NPF) of sharia commercial bank, murabahah financing allocation ratio to the allocation of profit loss sharing to the level of Non Performing Financing (NPF) ratio of sharia commercial banks. Ardiu [2] examines the effect of Non Performing Financing (NPF) and Financing To Deposit Ratio (FDR) Tehadap Return On Equity (ROE) In Sharia Rural Bank PNM Mentari Garut and the results of this study showed that Non Performing Financing (NPF) no significant effect on Return On Equity (ROE) where the influence of Non Performing Financing (NPF) of -2.076 <2.145 to ROE, Financing To Deposit Ratio (FDR) proved no significant effect on Return On Equity (ROE) where the influence of Financing To Deposit Ratio (FDR) of - 0.901 <2.145 to ROE, Non Performing Financing (NPF) proved no significant effect on FDR where the magnitude of Non Performing Financing (NPF) effect of -0.3140 <2.145 to Financing To Deposit Ratio (FDR) and the magnitude of Fcount is 2.4334 so Fcount ≤ Ftable, 2,4334 ≤ 3,80 which means accept Ho or Ha rejected means not significant where there is no p a significant influence simultaneously between Non Performing Financing (NPF) and Financing To Deposit Ratio (FDR) to Return On Equity (ROE) at PT. PNM Mentari Garut. Research by Tresna Asih Sekarwangi [10] with the title of Effect of Non-Performing Financing (NPF) and Capital Adequacy Ratio Against Islamic Bank Profitability in Indonesia Research shows that non-performing financing significant negative effect on profitability (Return On Equity), Capital Adequacy Ratio significant positive effect on profitability (Return On Equity). Thus the results of the study show Non Performing Financing and Capital Adequacy Ratio has an influence on profitability. Another study by Lia Yuliany [3] concerning the Influence of Financing To Deposit Ratio (FDR) and Non Performing Financing (NPF) to Profitability of Sharia Commercial Bank (Empirical Study on Sharia Commercial Banks Registered at Bank Indonesia Period 2008 - 2012) and The results of data analysis or regression results indicate that partially, Financing to Deposit Ratio (FDR) has not a significant effect to profitability as measured by Return On Assets (ROA) and Return On Equity (ROE). And then partially, Non Performing Financing (NPF) has a significant effect to profitability as measured by Return On Assets (ROA) and Return On Equity (ROE). While simultaneously, Financing to Deposit Ratio (FDR) and Non Performing Financing (NPF) have a significant effect to profitability as measured by Return On Assets (ROA) and Return On Equity (ROE). EJIF – European Journal of Islamic Finance No11, December (2018) http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 3 Farashita Aulia [1] also examined the effect of Current Asset Ratio (CAR), Financing To Deposit Ratio (FDR), Non Performing Financing (NPF) dan BOPO to Profitabilitas (Return On Equity) dan The result of this research shows that Current Asset Ratio (CAR) and BOPO had a negative and significantly influence on Return On Equity (ROE). Financing To Deposit Ratio (FDR) had a negative influence on Return On Equity (ROE), but it doen’t significantly influence Return On Equity (ROE). meanwhile, Non Performing Financing (NPF) has a positive and significant influence on Return On Equity (ROE). In relation to previous studies, the hypothesis proposed and which will be tested are as follows: H1 : Non-Performing Financing Influence Negative and Significant Against Return On Equity. III. DATA AND METHODOLOGY Types of research This research uses quantitative approach and uses statistical calculation technique. In this case, the quantitative approach is done by analyzing the Non-Performing Financing (NPF) data on the impact on Return On Equity (ROE) in Bank Syariah Mandiri (BSM), BNI Syariah Bank and Bank BRI Syariah period 2013-2015. Population and Sample Based on the data that researchers get that the population in this study is the data of Non-Performing Financing (NPF) and Return On Equity (ROE) at Bank Syariah in Indonesia. Samples in this study are Bank Syariah Mandiri (BSM), BNI Syariah Bank and Bank BRI Syariah period 2013-2015. Source of data obtained in this research is in the form of secondary data. Secondary data that writer use is taken from UKDW Stock Exchange Corner period 2013-2015. Data Analysis Technique Statistic analysis The results of this data processing is used to answer the problems that have been formulated. This analysis is used to show the relationship between the independent variable (X) with the dependent variable (Y). Statistical analysis includes: 1. Classic Assumption Test In this study, researchers will perform statistical tests regression in studying the relationship that exists between the variables are not free if the independent variables are known or vice versa. In practice there are four most commonly used classical assumption assays: 1.1. Normality Test This test is done to see if the distribution of data available is normally distributed / not. One of the statistical tests that can be used to test residual normality is non-parametric statistical test Kolmogorov-Smirnov (K-S). The K-S test is done by hypothetical: Ho : The residual data is normally distributed Ha : Residual data is not normally distributed Decision-making guidelines: a. Sig value or significance or probability value <0.05. Distribution is not normal. b. b. Sig value or significance or probability value> 0.05. Distribution is normal. 1.2. Multicolinearity test Multicollinearity test aims to test whether the regression model found the correlation between independent variables (independent). If independent variables are correlated, these variables are not orthogonal. To detect the presence or absence of symptoms of multicolinearity can be seen from the tolerance and VIF (variance inflation factor). If a low tolerance value is equal to a high VIF value, then it indicates a high colonierity (because VIF = 1 / Tolerance). Common Cutoff values used to indicate the presence of multicolinearity are tolerance values <0.10 or equal to VIF value> 10. 1.3. Heteroscedasticity Test Heterocedasticity test aims to test whether in the regression model there is a variance inequality of one observation residual to another observation. To test whether the variant of residual homogeneous use Spearman rank test, that is by correlating the five independent variables to the absolute value of the residual (error). If there is a significant independent variable correlation coefficient at error rate of 5%, indicating the occurrence of heterocedastisitas 1.4. Autocorrelation Test Autocorrelation test aims to test whether in the linear regression model there is a correlation between the confounding error in period t with the intruder error in period t- 1 (previous). The way used to diagnose autocorrelation is by Durbin-Watson test (DW test). Decision-making whether or not there is autocorrelation (Imam Ghozali, 2007) is: a. If DW is located between the upper bound (Upper bound / du) and 4-du, then there is no autocorrelation. b. If DW is lower than the lower limit (Lower bound / dl) then there is a positive autocorrelation. c. If the DW value is greater than (4-dl), then there is a negative autocorrelation. d. If the DW value lies between (4-du) and between (dl- du) then the result can not be concluded. 2. Simple Linear Regression Test Regression can be used to predict how far the value of the dependent variable changes, if the value of the independent variable is changed. Regression analysis, in addition to being used to measure the strength of the relationship between two variables, can also indicate the direction of the relationship between the dependent variable and independent variables. The general equation of simple linear regression is: Y = α + β X + ε EJIF – European Journal of Islamic Finance No11, December (2018) http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 4 Explanation : Y= Return On Equity (ROE) α = Constant, is the value of Y when X = 0 β = The direction of the regression coefficient, which states the change in the value of Y if there is a change of X value. If (+) then the direction of the line will rise, and if (-) then the value of the line will drop X = Non-Performing Financing (NPF) ε = other factors affecting variable Y 3. Hypothesis Testing The statistical test t basically shows how far the influence of a partially independent variable in explaining the dependent variable. This test is a two-way test with the hypothesis: H0 : β1=0 meaning there is no influence from independent variable to dependent variable. Ha : β1<0 or β1>0 meaning there is influence from independent variable to dependent variable. To calculate the value of t arithmetic used the formula: T hitung = β1 Se(β1) Wherin: β1 = correlation coefficient Se (β1) = standard error regression coefficients Testing criteria: a. H0 is accepted and Ha is rejected if t count ttable, meaning that independent variables significantly influence the dependent variable. Another alternative to see the effect of partial is to see the significance value, if the value of significance formed under 5% then there is a significant influence of independent variables partially to the dependent variable. Conversely, if the significance is formed above 5% then there is no significant effect of independent variables partially to the dependent variable. IV. RESULT AND DISCUSSION Analysis 1. Classic Assumption Test Result 1.1. Normality Test The results of normality test (Kolmogorov-Smirnov test) can be seen in table 3 below: Table 3 Normality Test Results (Kolmogorov-Smirnov Test) Sample Significance Result 36 0.000 H0 accepted Source: Data processed Result of normality test (Kolmogorof-Smirnov test) in table 1 above shows that asymp value. Sig. for 0.000, this shows that the sig value is greater than the trust value (a = 0.05). Therefore it can be concluded that Ha is rejected and receives H0 so that the residual data is normally distributed. 1.2. Test Multicolonearity Multicollonierity test results (VIF test) can be seen in table 4 below: Table 4 Multicollonearity Test Results (Uji VIF) Independent variable Tolerance VIF NPF 1.000 1.000 Source: Data processed Multicollonierity test results (VIF test) In Table 2 it shows that VIF value is less than 10 and tolerance is more than 0.1 which means that the regression model does not contain multicolonierity. 1.3. Heteroscedasticity Test The results of heteroscedasticity test (Glejser test) can be seen in table 5 below: Table 5 Heteroscedasticity Test Results (Uji Park) Variable Significance Result NPF 0.008 Non Heteroskedastisitas Variabel Dependen: RES_2 Source: Data processed The result of heteroscedasticity (Glejser test) in Table 4.6 above shows that the independent variable has a sig value under α (0.05). Therefore it can be concluded that the regression model there are no symptoms of heteroskedastisitas on NPF Variables. 1.4. Autocorrelation Test The autocorrelation test results can be seen in table 6 below: Table 6 Autocorrelation Test Results (Run Test) Sample Significance Conclusion 36 1.398 H0 accepted 2. Simple Linear Regression Test Result Table 7 Simple Linear Regression Test Result Variable t Significance Result NPF -2.501 0.017 H1 Accepted EJIF – European Journal of Islamic Finance No11, December (2018) http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 5 Based on the results of Simple Linear Regression testing the effect of Non Performing Financing (NPF) (X) on Return On Equity (ROE) (Y) by using SPSS program obtained tcount -2.501 with p value 0.017, so it can be concluded H1 accepted. This shows that there is a negative and significant influence of Non Performing Financing (NPF) (X) on Return On Equity (ROE) (Y). The Influence of Non Performing Financing (NPF) To Return On Equity (ROE) Based on the results of the test using a simple linear regression the effect of Non Performing Financing (NPF) on Return On Equity (ROE) using SPSS program obtained tcount -2.501 with p value 0.017. H1 hypothesis built on this variable is Non Performing Financing (NPF) has a negative and significant effect on the variable Return On Equity (ROE). Because the value of p value 0.017> 0.05 can be concluded H1 accepted. This shows that Non Performing Financing (NPF) has a negative and significant effect on Return On Equity (ROE). The influence of Non Performing Financing (NPF) on Return On Equity (ROE) shows the high level of Non Performing Financing (NPF) in a syariah bank can show the quality of unhealthy Islamic banks. The constraint is caused by any financing provided by the bank, not all of the financing can be fully refunded by the customer. Thus, causing high Non Performing Financing (NPF) in sharia banks can give a negative impact on the profitability of sharia banks. This is in line with that submitted by Dendawijaya [4] which suggests the impact of the existence of Non Performing Financing (NPF) is not unusual one of them is the loss of opportunity to earn income (income) from credit given, thus reducing the profit and adversely affect profitability. The result of this research is supported by Tresna Asih Sekarwangi [10] where Research shows that non-performing financing significant negative effect on profitability (Return On Equity), as well as research by Lia Yuliany [3] where the research result is Non Performing Financing (NPF) have a significant effect to profitability as measured by Return On Equity (ROE). However, it is slightly different in the Farashita Aulia study [1] where it was found that Non Performing Financing (NPF) has a positive and significant influence on Return On Equity (ROE). This study is inconsistent with findings of research conducted by charisma [8], where there is a non-significant influence between Non Performing Financing (NPF) on profitability. Similarly, research from Ardiu [2] which indicates that Non Performing Financing (NPF) proved no significant effect on Return On Equity (ROE). V. CONCLUSION The result of Non Performing Financing Test (NPF) also has a significant effect on profitability measured by Return On Equity (ROE) in sharia banking period 2013 - 2015. Regression coefficient result shows negative relationship, that means if Non Performing Financing (NPF) increases then profitability of sharia banks will decline. The influence of Non Performing Financing (NPF) on Return On Equity (ROE) shows the high level of Non Performing Financing (NPF) in a syariah bank can show the quality of unhealthy Islamic banks. Thus, causing high Non Performing Financing (NPF) in sharia banks can give an illustration will negatively affect the profitability of sharia banks. VI. RECOMMENDATION In order to maintain the stability of the number of problem financing (NPF), the bank should always be proportional in applying prudential regulation (prudential regulation). That is, the bank should not be too easy and also not too tight in providing financing. So the amount of Non Performing Financing (NPF) does not jump sharply that if it happens can disrupt the profitability of sharia bank.. REFERENCES [1] Aulia, Farrashita, Pengaruh CAR, FDR, NPF dan BOPO terhadap Profitabilitas (Return on Equity), Skripsi, Fakultas Ekonomika dan Bisnis, Univesitas Diponegoro, Semarang 2015. 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Skripsi, Analisis Pengaruh CAR, NPF, BOPO, FDR, dan NCOM Terhadap Profitabilitas Bank Umum Syariah Di Indonesia (Studi kasus Pada Bank Umum Syariah di Indonesia Periode 2008-2012) Fakultas Ekonomika Dan Bisnis Universitas Diponegoro Semarang EJIF – European Journal of Islamic Finance Editorial Team Editor in Chief Prof. Paolo Pietro Biancone, University of Turin, Italy Editorial Board Prof. Dian Masyita, University of Padjadjaran, Indonesia Prof. Abdulazeem Abozaid, Qatar Faculty of Islamic Studies – Qatar Prof. Ahmad Aref Almazari, King Saud University, Saudi Arabia Prof. Nidal A. Alsayyed, Inayah Islamic Finance Research Institute, USA Prof. Roberta Aluffi, University of Turin - Italy Prof. Ghassen Bouslama, NEOMA Business School - Campus de Reims, France Prof. Nazam Dzolkarnaini, Salford University, UK Prof. Kabir Hassan, University of New Orleans, USA Prof. Khaled Hussainey, University of Plymouth, UK Prof. Rifki Ismal, University of Indonesia Prof. Tariqullah Khan, Hamad bin Khalifa University, Qatar Prof. Ali Khorshid, ICMA Centre Reading University - UK Prof. Amir Kia, Utah Valley University, USA Prof. Laurent Marliere, Université Paris-Dauphine France Prof. Federica Miglietta, University of Bari - Italy Prof. Hakim Ben Othman, University of Tunis - Tunisia Prof. Mohamed Ramady, King Fahd University of Petroleum and Minerals, Saudi Arabia Prof. Mamunur Rashid, Nottingham University, Malaysia Prof. Younes Soualhi, International Islamic University Malaysia Prof. Laurent Weill, University of Strasbourg, France