Mohammad Bekti Hendrie Anto

This study examines the determinants of Islamic banks’ non-performing financing from the perspective of regional and sectoral aspects during the periods before and during the pandemic. The study adopts a dynamic panel data analysis, namely the Generalized Method of Moments, and assesses panel data from the Indonesian banking industry in 32 provinces from October 2018 to July 2021 on a monthly basis. The study uses non-performing financing as the dependent variable and regional inflation, total financing, financing to deposit ratio, and Islamic bank size as the dependent variables. The findings indicate that the COVID-19 pandemic generally influenced the performance of non-performing financing in Islamic banks. This was evident in the significant relationship between regional inflation, total financing, financing to deposit ratio, and the non-performing financing value. Moreover, in the sectoral analysis, a different level of impact was observed in each sector. The most severe impact was seen in the construction sector, while other sectors were less affected during the pandemic. The regional analysis shows that all provinces on Java Island, as the epicenter of the pandemic in Indonesia, did not perform better than the provinces outside Java. Concerning policy implications, the Indonesian Financial Services Authority must be more aware of the determinants of Islamic banks’ non-performing financing by considering sectoral and regional aspects. Furthermore, sectoral and regional-based policies should be developed to achieve and maintain the performance of Islamic banks’ non-performing financing.

Acknowledgments
We are grateful to the Pusat Pengembangan Ekonomi (PPE), Faculty of Business and Economics, Universitas Islam Indonesia No. 259/KajurIE/XII/2021 for support and providing a research grant for the study

Islamic banks have become alternative intermediary institutions in the banking industry and are expected to play a significant role in the financial system. Therefore, this study aims to examine Islamic banks’ contribution to financial stability, also focusing on the underlying contracts implemented in financing activities from the perspective of a non-linear relationship. The study employs time-series data from 2006m1 to 2021m11 and adopts non-linear autoregressive distributed lag (NARDL). The findings reveal that the presence of Islamic banks has a non-linear influence on financial stability. Overall financing has a symmetric effect on financial stability, but an asymmetric effect is evident when total financing is categorized based on underlying contracts. Moreover, in the short run, musharakah financing strengthens financial stability, while during a long-run relationship mudarabah financing plays the most pivotal role in increasing the level of stability in the banking system. The study proposes that the financial authorities should be concerned with the non-linear symmetric and asymmetric relationships with Islamic banks, particularly in the underlying contracts that the banks employ. This is considered to be important to avoid financial instability in the banking system.

Acknowledgment
The authors gratefully acknowledge the support from Direktorat Penelitian dan Pengabdian Masyarakat (DPPM) Universitas Islam Indonesia No.: 023/ Dir/ DPPM/ 70/ Pen.Unggulan/ XII/ 2022 and for providing a research grant for the study.