“An analysis on the factors affecting profitability level of Sharia banking in Indonesia”

The purpose of this research is to analyze the influence of Capital Adequacy Ratio (CAR) Third Party Funds (TPF), Non Performing Financing (NPF), Financing to Deposit Ratio (FDR), Operation Cost Operating Income (OCOI), Net Operating Margin (NOM), Gross Domestic Product (GDP), inflation and Return on Asset (ROA) as a proxy of Islamic bank’s profitability in Indonesia during 2011-2014 periods. The population of study was Sharia banking (BS) in Indo-nesia. Time series data from Indonesian Banking Statistics 2011-2014 were used as the primary data. Multiple linear regression was applied as method of analysis. The result shows that CAR, NPF, FDR and NOM did not affect profitability, while TPF, OCOI had negative effect on profitability. Meanwhile, GDP and inflation variable had significant effect with positive direction.


Introduction
In the last decade, Islamic banking and finance or Sharia bank grow very significantly throughout the world (Outlook Global Islamic Economy, 2016) both in the countries with majority Muslim population and in western countries with majority non-Muslim population (Saeed, 2006;Said, 2014).The growth in the global industry is broadly measured by the quantity and value of Islamic finance assets.In 2011, there were more than 300 Islamic financial institutions operating in more than 75 countries worldwide (Hassan and Saleh, 2011; Taylor, 2003;Ganadian & Gosmawi, 2004;Ar Roubaie et al., 2010).Currently, Islamic financial institutions evolve throughout world (Perry V and Rehman, 2011; di Moura, 2013; Abdullah and Chee, 2010; al Jayyiousi, 2012).The 2015 report on Islamic banking and Financial Development states that the world's total Sharia financial assets were $2 trillion, with Islamic banking representing 73 percent of these (OGIE, 2016).Indonesia as the country with which Muslim population number is the largest in the world should be the center of Sharia economic and financial development.The fact of matters as indicated by the Global Islamic Financial Report (GIFR, 2014), Indonesia occupies the fourth position among other countries with total asset US$ 35,65 billion.It occupies the top ninth position in the world.
In national scope, Otoritas Jasa Keangan (Financial Service Authority) reported that per May 2015, the total asset of Indonesian Sharia banking has reached IDR 278.91 trillion with marketplace of 4.67%.The asset value of Islamic banking and finance is still Muhammad Said, Herni Ali, 2016.Muhammad Said, Faculty of Economics and Business State Islamic University Syarif Hidayatullah Jakarta, Indonesia.Herni Ali, Faculty of Economics and Business State Islamic University Syarif Hidayatullah Jakarta, Indonesia.
small compared to the national banking (GIFR, 2015).Statistic data on the growth rate of Sharia bank during 2010-2014 show that the percentage growth rate of Sharia bank is still better than that of conventional one thought its growth rate tends to decrease.Detail comparison on the growth rate between Islamic and conventional bank can be seen in the following table.Source: Indonesian Banking Statistics (processed).
The growth rate of banking is determined by many factors.According to the note of the prior researches, the bank's ability of maintaining competitiveness and of yielding profitability as the most important indicator to measure a bank's performance is one of the determinant factors.There are some principles underlying the Islamic banking and finance.First, Islamic banking and finance (IBF) system is built on fundamental principles that the life of human being depends on material sources as the media provided by God to meet their needs, b) Islam orders investment and prohibits monopoly or evoking wealth, c) investment conducted in such a way that could ensure the fulfillment of basic needs, d) the prohibition of riba, e) Zakat is an essential element of Islamic economy system, f) economic system depends on a firm and rooted moral standard in Islamic social system concerning what forbidden and fault (Haron and Azmi, 2009).Second, commerce and trading are free from usury, gharar (fraud) and speculation.Thirdly, economy as a part of all aspects of life is originating from tauhid (unity of God) principle (Wilson, 1997).

Research methodology
2.1.Data sources and technics of analysis.This research applied time series data obtained during 2010-2014 as the main data sources with the main focus to be analyzed CAR, ROA, TPF, NPF, FDR, NOM, OCOI, GDP and inflation.The data were analyzed using statistic descriptive and classical assumption tests, and hypotheses testing was carried out using a multiple regression model with the equation below: Hypotheses testing was carried out using statistic test considering the result of multiple regression equation established above, including: R 2 (coefficient of determinant) test, measuring the model's ability of explaining dependent variable variation, with the following criteria of R 2 values: very low (0.000 -0.199), low (0.20 -0.399), moderate (0.40 -0.599), strong (0.60 -0.799) and very strong (0.80 -1.000).Meanwhile, for the multipleregression model with more than two independent variables, Adjusted R 2 was used as coefficient of determinant (Gazali, 2009; Santoso, 2001).

T-test (partial test)
T-test or partial test or individual test was used to see the effect of independent variable individually (partially) on dependent variable.Similar to F-test carried out by considering significance value, it was conducted with the same stipulation: when significance value > 0.05, Ho is supported and H1 is not supported, meaning that there is no simultaneous effect.Meanwhile, when significance value < 0.05, Ho is not supported and H1 is supported meaning that there is a partial effect.

F-test (simultaneous test)
Simultaneous statistic test or F-test was used to indicate whether or not all of independent variables in the model affect simultaneously the dependent one.The test was carried out by considering significance value, with the following stipulation: when significance value > 0.05, Ho is supported and H1 is not supported, meaning that there is no simultaneous effect.Meanwhile, when significance value < 0.05, Ho is not supported and H1 is supported meaning that there is a simultaneous effect.

Operational definition of variables
The research consisted of two variables, dependent and independent with the detail of operational definition as follows: a

Normality test
Normality test is carried out to find out whether or not data are distributed normally.This test is conducted by considering the p-plot chart and using Kolmogorov Smirnov test.Result of test found that the data have been distributed normally which indicated by the points in the chart spreading around or close to diagonal line or its p-plot line, and KS test obtains significance value > 0.05 for all variables, so that the data are not distributed normally.
Source: data processed with SPSS.Source: data are processed with SPSS.
a.The result of test found that the data have been distributed normally.It can be seen from the points in the chart spreading around or close to diagonal line or its P-plot line, and KS test obtains significance value > 0.05 for all variables, so that the data are not distributed normally.b.Heteroscedasticity c.This test is conducted to find out whether or not there is variance or residual difference between one observation and another in the regression model established.This test is carried out by considering the pattern apparent in the scatter plot.
Based on the result of test, it can find out the points in the chart in which they are distributed randomly and do not form certain pattern.
Source: data are processed with SPSS.

Fig. 2. Heteroscedasticity test
This test is carried out by considering the size of tolerance and variance inflation factor (VIF).Considering the result of test, it can be found that for each of variables, the tolerance value > 0.10 and variance inflation factor (VIF) value < 10.Source: data are processed with SPSS.
The result above shows that one variable is indicated as having multicolinearity symptom, but in this research, the variable remains to be included into variable with limited data, so that it can be said that there is no problem with the regression model constructed.

c. Autocorrelation
This test was conducted to see whether or not there is a correlation between confounding error in t period and that in previous period.The good regression model is the one independent of autocorrelation symptom.For this test, Durbin-Watson (DW) test is carried out with the criterion that when d < 4 -dl, there is no autocorrelation symptom.Or, according to Wahid Sulaiman (2004), the criterion is as follows: when 1.65 < DW < 2.35, there is no autocorrelation; when 0.21 < DW < 1.65, it cannot be inferred and when DW < 1.21, there is autocorrelation symptom.Considering the result of test with SPSS, it can be found DW value of 1.360, meaning that autocorrelation cannot be inferred when the criterion is base on Wahid Sulaiman (2004).Source: data are processed with SPSS.

Coefficient of determinacy (R 2 )
Having conducted classical assumption test finding that the data and regression model is independent of normality, heteroscedasticity and multicolinearity problems, the next is conducted, that is, hypotheses testing consisting of coefficient of determinacy (R square test), T-test (partial) and F-test (simultaneous).Source: data are processed with SPSS.
Considering the Table 5

First hypothesis (H1). 5.1.1. H1: Capital Adequacy Ratio (CAR) affects positively the profitability of Sharia banking.
Based on Table 3.6, the coefficient value of 0.025 is obtained for CAR, and significance value for DPK is 0.315 meaning that it is larger than alpha ( ) of 0.05.It means that Capital Adequacy Ratio (CAR) does not affect positively the profitability of Sharia banking in Indonesia with positive direction of relation.The result of research suggests that every one unit increase in CAR of some banking does not certainly impact on the increase in ROA of bank.Thus, H 1 can be supported or not be supported.
The result of research supports Edi Satrio and Muhammad Syaichu's (2013) study finding that CAR does not affect ROA.It indicates that the size of bank's asset (CAR) uncertainly affects the size of bank's profitability.In the bank with large asset, but with no ability of using its asset effectively to yield profitability, the asset will not affect significantly the profitability of bank.In the presence of Sharia bank's attempt of maintaining asset adequacy, the bank cannot issue their fund easily for funding, because it can generate big risk.
Mona Abdullah (2009) in EdhiSatrio (2013) stated that Capital Adequacy Ratio cannot affect the bank's ROA.
It shows that at least 8% of CAR size that should be met by bank does not exert belief and secure feeling effect on the public so that CAR 8% is only intended by Indonesian banks to meet the preconditions of internal banking.The public's trust is due to the presence of government's insurance over the fund they save in bank.Thus, CAR ratio perhaps does not affect the profitability of bank.
In addition to the two explanation above, CAR does not affect the profitability of bank, because the increase in CAR is not compensated with the increase in productive asset, but the increase of CAR in Sharia banking such as subsidiary office opening is accompanied with the increase in non-productive asset number or the increase in problematic financing, so that it even gives the bank the negative result, because the bank's cash flow becomes not optimal; therefore, the profitability of bank is not good.Considering the data of research as shown in Figure 3 in the period of 2014, NPF level of Sharia banking in Indonesia increases compared with that in previous years; it is that likely makes the result of current research insignificant.

Second hypothesis (H 2 ). H 2 : Third Party Fund (DPK) affects positively the profitability of Sharia banking.
Table 6 shows that significance (sig.)value is 0.000 and coefficient value is -0.005115.It indicates that Third Party Fund (DPK) affects the profitability of Sharia banking.But, considering the coefficient value obtained, the result suggest that the relationship between two of them is negative, meaning that the increase in the third party fund instead results in the lowered profitability of bank.This result is in contradiction with the hypothesis.Thus, H 2 is not supported.
The result of research is in contradiction with the hypothesis developed, in which the higher the marketplace of third party fund, the higher is the loan given.The increase in loan capacity results in the increased interest income revenue, so that the bank's profit increases as well (Sinungan, 2000 in Edhi Satrio and Muhammad Syaichu, 2013).
However, the result of current research is in line with Sukma (2009) finding that the third party fund (DPK) affects negatively the ROA.It means that the total third party fund will decrease the profitability of Sharia banking.The appearance of negative sign in the simultaneous result for DPK may be due to the less maximal distribution of third party fund to financing thereby not getting profit from its financing activity.

Third hypothesis (H 3 ). H 3 : Non-Performing
Financing (NPF) affects negatively the profitability of Sharia bank.Considering the data processing shown in Table 6, coefficient value of -0.042 is obtained for NPK with significance value of 0.717 larger than alpha ( ) of 0.05.It means that nonperforming financing variable does not affect the profitability of Sharia banking.Thus, H 3 is not supported.
This insignificant result is likely, because the data of NPF used in the research are not the one targeted by the bank management, but historical NPF that has occurred in research period.As the NPF targeted by management reflects on control level and financing policy to be implemented by the bank (Pratin, 2005).
If the company targets a low NPF, it means that the bank management will apply the profit sharing financing distribution policy more tightly (cautiously).On the contrary, when the targeted NPF is larger, the distribution of profit sharing financing will be easier (looser).Thus, the policy taken will impact on the bank's profitability performance.Meanwhile, in this research, the data of NPF used is not the one targeted by the bank management.Thus, the bank's profitability performance in this study is not affected by non-performing financing (NPF) factor, as explained above.

Fourth hypothesis (H 4 ). H 4 : Financing Deposit
Ratio (FDR) affects positively the profitability of Sharia banking.Considering the Table 6 above, it can be found that the significance (sig.)value of 0.953 is larger than alpha ( ) of 0.05.It indicates that Financing Deposit Ratio (FDR) fund does not affect the profitability of Sharia banking.This result is in contradiction with the hypothesis, so that H 4 is not supported.
Financing to Deposit Ratio (FDR) is ratio of financing distributed by bank to the third party fund successfully collected by Sharia general bank.The higher this ratio, the more effectively the Sharia bank distributes its finance.However, this successful ratio is highly dependent on the quality of financing distribution which means that although the amount of financing distribution is high, but if it is not accompanied with the low non-performing financing or NPF, it would not yield profitability to the bank; instead, it will bring loss to the bank.The result of current research shows that the financing distribution conducted does not affect considerably the profitability of Sharia bank.
This result is consistent with the result in the second hypothesis finding that Third Party Fund (DPK) does not affect the profitability of Sharia general bank.It is because the distribution of third party fund is less maximal to financing so that the bank does not get profit from its financing activity (Sukma, 2009).

Fifth hypothesis (H 5 ). H 5 : BOPO affects negatively the profitability of Sharia banking.
Considering the data processing shown in Table 6, it can be found that the coefficient of -0.026 for BOPO and significance value of 0.02 are smaller than alpha ( ) of 0.05; thus, from this research it can be seen that BOPO variable affects the profitability of Sharia banking with negative direction of relation, meaning that the higher the BOPO ratio, the less efficient is the bank leading to the decreased profitability of bank.Thus, H 5 is supported.
The result of research is consistent with the hypothesis, indicating that the higher the financing load level of bank, the smaller is the profit the bank obtains.The high operating cost load of bank the bank should as-sume generally will be imposed to the income deriving from financing allocation.The higher loan load or cost will reduce the capital and profit the bank has.The result of current research is in line with that of studies conducted by EdhiSatrio and Muhammad Syaichu (2013), Yuliani (2007) and YacubAzwir (2006).Theoretically, the improvement of financing distribution to customers should improve the bank's income.NOM size indicates that operating income is subtracted with profit sharing fund and subtracted with operating cost is larger than the mean productive asset, so that the increase in profit sharing income over the mean productive asset the bank manages will increase the bank profitability.However, in fact, financing distribution to customers are not followed with the effective management of productive asset by bank; it can be seen from the high non-performing financing ratio, thus, the increase in NOM does not impact directly on the increased profitability of bank.

Seventh hypothesis (H 7
). H 7 : Gross Domestic Product (GDP) affects negatively the profitability of Sharia bank.Considering the data processing shown in Table 3.6, it can be found the coefficient of 0.0001778 for GDP and significance value of 0.008 smaller than alpha ( ) of 0.05; thus, from this research it can be seen that GDP variable affects the profitability of sharia banking with positive direction of relation, meaning that the higher the GDP ratio, the higher is the profitability ratio of Sharia banking.Thus, H 7 is supported.A country's economic growth (GDP) is closely related to welfare and prosperity its people can feel.Economic growth (GDP) becomes indicator of macroeconomics, as well can affect the profitability of bank; if GDP increases, the people's income would increase so that the saving ability would increase as well.This increased saving will affect the profitability of bank (Sa-donoSukirno, 2003).This theory is confirmed by the finding of a study conducted by Ali et al. (2011) on general and Sharia banks existing in Pakistan, the result of which concluded that Gross Domestic Product (GDP) has significant positive correlation with the amount of saving collected by bank in Pakistan.The result of current research shows that instead, the increase in inflation rate occurring affects positively the performance of Sharia general bank; this study indicates that the increase in inflation will improve the profitability of Sharia bank.It is perhaps because basically the high inflation reflects on the increase in the goods' price occurring generally due to money circulation exceeding the volume of goods or to the increase in production cost.In such the condition, the government as regulator usually will issue a monetary policy to deal with inflation, one of which is disconto police, that is, to increase or to decrease the reference interest rate.As we know, the character of Sharia bank is to proscribe the presence of interest system and to allow (to legalize) the presence of profit sharing.This character likely avoids the Sharia bank from the effect of fluctuating interest rate.It means that when inflation occurs and government issues an interest rate policy, such the policy does not affect considerably the performance of Sharia banking.Even, inflation will result in deposit rate and the financing the Sharia bank makes will be higher.The increase in the portfolio of sharia general bank during inflation indicates the public's trust in Sharia bank's durability (survival) and the customers begin to recognize that Sharia bank would have larger durability and certainty during inflation.

Conclusion
The result of hypothesis testing and discussion above, it can be concluded that Capital Adequacy Ratio (CAR) does not affect the profitability of Sharia bank in Indonesia; Third Party Fund (TPF) affects negatively the profitability of Sharia bank; Non Performing Financing (NPF) does not affect the profitability of Sharia bank; Financing Deposit Ratio (FDR) does not affect the pro-fitability of Sharia bank; COOIC affects negatively the profitability of Sharia general bank in Indonesia; Net Operating Margin (NOM) does not affect the profitability of Sharia bank; Gross Domestic Product (GDP) affects positively the profitability of Sharia bank, and inflation affects positively the profitability of Sharia bank in Indonesia.

Implication
Based on the conclusion above, it is recommended to the management to increase the profitability of Sharia bank by issuing the operation cost operating income (OCOI) more selectively so that the bank's efficiency will improve and the ROA of bank as well.
The bank should maintain its Capital Adequacy Ratio (CAR) at 8% corresponding to BI's regulation to maintain the public trust which will affect the health of bank as well.The bank should maintain the Sharia principle far away from usury (interest) principle.Thus, the change of interest rate will affect only slightly the profitability of sharia bank.In addition, the bank should distribute financing selectively to the public in order the NPF level can be suppressed to improve the profitability of bank.
Then, to other researcher needs to explore further and to expand the factors affecting the profitability of Sharia bank by adding macroeconomic variable, external factor, fundamental factor of banking, or Sharia banking character factor.It is also noteworthy to add risk variable as dependent variable to make the future research contributing more considerably.

Table 1 .
Growth rate of conventional and Sharia banking

. Principles of Islamic banking and finance. The
Though the growth of Islamic banking and finance has attracted a great deal of enthusiasm of the researchers, but it has also been subject to a number of other criticisms which one is its inability to get away from the trappings of conventional banks(Wilson,  1999; Tlemsani and Matthews, 2009; Isam and Matthews, 2009; Kingstone, 2009).
Saeed, 1996;ah and Razak, 2008) of asset(Khasawneh  etal., 2014; Silvia Hendrayanti, 2013; Margaretha and Zai, 2013; Sabir et.al., 2012; Ali et al., 2011; Moh.Akabar and Nor Hayati, 2011; Dennis Olson and Taisier A. Zoubi, 2011; Sukarno and Syaichu, 2006.verted(Akkizidis and Khandelwal, 2007).These two kinds of banks are different in principles and doing the same functions as the mediary financial institution.Islamic banking and finance is claimed free of interest, while the conventional banking is using interest as a time factor for borrowed money(Taib, Ramayah and Razak, 2008).Islamic banking and finance is also lighted by the Sharia values, ethics and universal moral philosophy (Robin and Reidenbac, 1987).It integrates religious and cultural values with the specific goals of Shariah (maqashidasysyari'ah) such as the wisdom and welfare of the people both in this world and hereafter as well (Chapra, 1985, p. 33; Abdullah and Chee, 2010;Saeed, 1996; al Joyyiousi, 2012).The experts defined Islamic banking and finance as the finance must not purchase equity in or provide credit to product and activities prohibited by religion such as riba and gharar (Pitluck, 2012, p. 433).

Table 2 .
Normality test with KS

Table 3 .
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Table 5 .
Coefficient of determinacy test
Table 6shows the coefficient value of 0.075 for inflation with significance value of 0.002 smaller than alpha ( ) of 0.05; thus, from this current research, it can be found that inflation variable affects positively the profitability of Sharia banking.It means that if there is an increase in inflation rate, the profitability of Sharia bank in Indonesia would increase.It is in contradiction with the hypothesis stating that inflation affects the profitability with negative direction of relation.Thus, H 8 is not supported.