The Impact of Banks Characteristics Variables on Indonesian Islamic
Banks Profitability
Cupian Cupian and Riki Relaksana
Department of Economics, Faculty of Economic and Business Universitas Padjadjaran, Indonesia
Keywords: Bank characteristics, Islamic banks, Indonesia, profitability.
Abstract: Recently, Islamic Banks in Indonesia are going to become more challenging. Due to this situation, it is
important for these banks to strengthen their business performance in order to face with the strong competition
among banks. The performance of these banks can be measured through profitability which is influenced by
various factors. The internal determinants that resulted from bank management decision and policy may
definitely affect the bank’s operating activities as well as its profitability. Therefore, this research is conducted
to study the factors which determine profitability of Islamic banking institutions where special focus is given
on bank-specific characteristics. The Least Square Dummy Variable (LSDV) panel data analysis. Five of
eight independent variables, are significant in determining the profitability of Indonesian Islamic banks. The
third party funds affect negatively profitability indicator. Overhead cost also influence banks’ profitability
negatively that demonstrates this variable contribute in reducing profitability. Meanwhile, total asset has
positive relationship with profitability indicator indicates that banks of large size enjoy scale economy and
achieve higher revenue. The interest-free earning assets affects profitability positively indicates that Islamic
banks are keen to rely on this factor to enhance their profitability. Moreover, the positive impact of increased
income from services activities on profitability reveals that Islamic banks so far has an important role in as
sources of revenue. Interest free earning assets is the most important of bank characteristics that determines
Indonesian Islamic banking’s performance.
1 INTRODUCTION
The existence of Islamic banking in Indonesia is
initiated by the Indonesian Ulama’ Council (MUI) in
1990 withheld its first symposium on “Issues in
Interest and Banking.” The participants did realize
that some Muslim communities in Indonesia would
simply not use conventional banking services. As a
result, they formed a task force, and recommended
that the government create the conditions for
establishing Islamic banks.
Recently, the international and domestic
environments in which Islamic Banks operate are
going to become even more challenging. Due to this
situation, it is important for Islamic banking
institutions to strengthen their business performance
in order to face with the strong competition among
banks operating in Indonesia (Islamic or conventional
banking). Healthy and sustainable profitability is vital
in maintaining the stability of the banking system.
The performance of these banks can be measured
through profitability which is influenced by various
factors. The internal determinants that resulted from
bank management decision and policy may definitely
affect the bank’s operating activities as well as its
profitability. In addition, a sound and profitable
banking sector is able to face negative shocks and
contribute to the stability of the financial system itself
(Atanasoglu, et al, 2008). Thus, it is vital for Islamic
banking institutions to know the factors which may
influence the profitability of the firms in order to
perform better and be competitive in the global
environment.
Therefore, this research is conducted to study the
factors which determine profitability of Islamic
banking institutions in Indonesia, where special focus
is given on bank-specific characteristics. Accordingly
bank specific-characteristics are the internal
determinants or internal factors that are mainly
influenced by bank’s management decisions and
policy objectives. Such profitability determinants
include third party funds, Income from financing
activities, Income from services activities, overhead
cost capital adequacy, credit risk, liquidity, bank size
Cupian, C. and Relaksana, R.
The Impact of Banks Characteristics Variables on Indonesian Islamic Banks Profitability.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 267-275
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
267

and expenses management (Izhar and Asutay, 2007).
Bank-specific characteristics have been a focus to
study bank’s profitability where previous studies
have shown that the firm-level effects are the most
important class of effect in explaining the variation in
performance (Goddard et al, 2009). The study will
assist Islamic Banks in Indonesia to improve their
profitability and in turn, the competitiveness and
efficiency of the Islamic banking system to enable it
to be developed in line or even better compared to
conventional banks.
2 LITERATURE REVIEW
In general, bank profitability is usually measured by
ROA, ROE, NIM and Tobin’s Q and expressed as a
function of internal (bank-specific) and external
(macroeconomic, industry-specific and bank
governance) factors. Among the studies of the effects
of determinants on bank profitability in different
countries are: Bourke (1989), Molyneux and
Thornton (1992), Stienherr and Hiveneers (1994),
Demirguc-Kunt and Huizinga (1999), Mamatzakis
and Remoundos (2003), Micco et al. (2007),
Pasiouras and Kosmidou (2007), Athanasoglou et al.
(2008), Garcia-Herrero et al. (2009), Fadzlan (2010),
Alper and Anbar (2011), Dietrich and Wanzenried
(2011), Kanas et al. (2012), Bolt et al. (2012), Rachdi
(2013). In addition, there have also been studies on
the profibality of the Islamic banks were conducted
by Haron (1996), Hassan and Bashir (2003).
Variables such as capital ratios, leverage, operational
efficiency, loan (financing), liquidity and bank size
have a large or less impact on bank profitability.
With regard to the effect of funding activities on
profitability, Smirlock (1985) argued that demand
deposits were a cheaper source of funds and had a
positive impact on bank profits. However, Kwast and
Rose (1982) concluded that operating efficiency had
nothing to do with profitability. They also found that
there was no compelling evidence that high-profit
banks were characterized by a greater level of
efficiency than low-profit banks. In the analysis of
internal determinants, source of fund is represented
by consumer and short-term funding to total assets.
Other previous studies conducted by Demirguc-Kunt
and Huizinga (1997), Bashir (2000) found that third-
party funds adversely affect profitability of banking.
Izhar and Asutay (2007) investigated the
determinants of profitability in case of an Islamic
bank in Indonesia. They found that three sources of
funds for Islamic banks are negatively related with
profitability indicator. Most previous studies had
found that third party fund was in inverse relationship
to profitability.
Among other previous studies, Haron (1996)
found that the percentage of incomes from financing
activities had a positive relationship to profitability.
His findings indicated the incremental increase of
Islamic banks’ income from financing activities.
Therefore, based on his results, he suggested that the
profit-sharing ratio between Islamic banks and the
users of funds favours the bank. Incomes from service
activities are also expected to have positive
relationship with profitability indicators.
Dietrich and Wanzenried (2011) found no
correlation between the equity over total assets (EQ),
as a proxy of capital adequacy. In his findings the
coefficient is always negative but never statistically
significant when using return on average equity
(ROAE). When using Net Interest Margin (NIM), the
coefficient is always positive but never statistically
significant. Other studies conducted by Demirguc-
Kunt and Huizinga (1997), Garcia-Herrero et al.
(2009), Fadzlan (2010), Liu et al. (2010) and Suminto
and Yasushi (2011), concluded that the best
performing banks are those who maintain a high level
of equity relative to their assets because they can face
lower costs of funding due to lower prospective
bankruptcy costs. Another previous studies of the
determinants of bank profitability conducted by
Bourke (1989) for the United States case. He found a
strong and statistically significant positive
relationship between Equity and profitability. This
supports the view that profitable banks remain well
capitalized; or the view that well-capitalized banks
enjoy access to cheaper (less risky) sources of funds
with subsequent improvement in profit rates.
Concerning Islamic banking, Izhar and Asutay (2007)
suggested that EQ did not have a significant impact
on profitability ratios but it is found to have negative
relationship with ROA.
Furthermore, there is also empirical evidence that
liquidity, measured by total loans to total assets,
affects bank profitability and negatively affects bank
profitability measured ROA, ROE and NIM (Liu et
al. 2010). Bashir (2000), Athanasoglou et al. (2006),
Sufian and Habibbullah (2009) and Wasiuzzaman
and Tarmizi (2010) supported this positive
relationship. On the other hand, a positive
relationship between the ratio of bank loans to total
assets and profitability was also found using an
international database (Demirguc Kunt and Huizinga,
1999). Loans are the largest component of interest
bearing assets of a bank and are expected to have a
positive effect on bank’s profitability (Vong and Hoi,
2009). For the study on Islamic banks, Alkassim
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
268

(2005) revealed that liquidity plays an essential role
in determining the profitability of banks. By taking
the net loans to total asset as a liquidity proxy, this
ratio provides a measure of income source. He
confirmed this for both conventional and Islamic
banks, which tend to have similar liquidity ratios.
Bank loans are expected to be the main source of
revenue, and are expected to impact profit positively.
However, since most Islamic banks’ loans (financing)
are in the form of profit and loss sharing (PLS)
financing with equity features, the loan–performance
relationship depends significantly on the expected
performance of the economy. During a strong
economy, only a small percentage of the PLS
financing will default, and the bank’s profit will rise.
On the other hand, the bank could be severely
damaged during a weak economy, because several
borrowers are likely to default on their loans. Ideally,
banks should capitalize on favorable economic
conditions and insulate themselves during adverse
conditions (Izhar and Asutay, 2007).
Another determinant of profitability is the level of
operational efficiency. Athanasoglou et al. (2008) and
Goddard et al. (2009) indicated a positive correlation
between the cost income ratio and bank profitability.
In contrast, Dietrich and Wanzenried (2011) found a
negative and highly significant relationship between
operational efficiency and profitability, measured by
ROAE and NIM, in the Swiss banks over the period
1999-2006. To show efficiency in Islamic banks,
Izhar and Asutay (2007) used the ratio of overhead to
total assets (OC). It reflects employment, total
amount of wages and salaries as well as the cost of
running branch office facilities. Their research
finding was a positive impact of OC on Islamic banks
profitability.
The size of the bank is one the important bank-
specific variable. Studies by Dietrich and Wanzenried
(2011), Pasiouras and Kosmidou (2007) and Alper
and Anbar (2011) found a positive and statistically
significant relationship between bank size and bank
profitability because large banks have degree of loans
and product diversification than small and medium
banks. Trujillo-Ponce (2013) pointed out that large
bank can imply economies of scope for the bank
resulting from the joint provision of related services.
Micco et al. (2007) found, also, positive and but no
significant correlation. In contrast, Kasman (2010)
found a significant negative coefficient between bank
size and Net Interest Margin in a panel of 431 banks
from 39 countries. In terms of Islamic banks, Idris et
al. (2013) suggested that the Bank Size is the most
important factor in explaining the variation of
profitability for Islamic banking institutions in
Malaysia. He also stated that a bank with larger size
will fundamentally have better access to capital
markets, lower cost of borrowing and be able to
generate higher income.
3 METHODS
The aim of this paper is to investigate the relationship
between the profitability of Islamic banks against a
set of internal banks characteristics. Internal
profitability is evaluated by analyzing financial ratios.
While the operating efficiency and profitability
measures used as criteria for performance are
specified below. Capital ratios, leverage, overheads,
loan and liquidity ratios were used as proxies for
banks’ internal measures.
The study covers nine selected domestic and
foreign Islamic banking institutions that operate in
Indonesia such as Bank Muamalat Indonesia, Bank
Victoria Syariah, Bank Rakyat Indonesia Syariah,
Bank Jabar Banten Syariah, Bank Syariah Mandiri,
Bank Mega Syariah, Bank Panin Syariah, Bank
Bukopin Syariah, Bank Central Asia Syariah. The
data for this purpose is technically collected from
annual reports and financial statements of the selected
bank. The data collected is on a quarterly basis which
covers the 2010-2013 periods, consisting of one
dependent variable and eight independent variables.
The data is then converted into natural logarithm
values, with the intention that the estimated
coefficients can be interpreted as elasticities. The log-
log equation is as follows:
ln(ROA)= α + β1 ln(TPF) + β2 ln(IFIN) +
β3 ln(ISA) + β4 ln(OHC) + β5
ln(EA) + β6 ln(FR) + β7
ln(TA) + β8 ln(ER) + ε1
Where ROA is the measure of performance for
Islamic banks in Indonesia; TPF, IFIN, ISA, OHC,
EA, FR, TA, and ER are the financial structure
variables for Islamic banks.
Dependent variable used in this study is Return on
Assets (ROA). This measure is closely tied to the key
item in the income statement – net income. ROA has
been used in most structure-performance studies and
is included here to reflect the bank’s ability to
generate income from non-traditional services. ROA
shows the profit earned per rupiah (Indonesian
currency) of assets and most importantly, reflects
management’s ability to utilize the bank’s financial
and real investment resources to generate profit. For
any bank, ROA depends on the bank’s policy
The Impact of Banks Characteristics Variables on Indonesian Islamic Banks Profitability
269

decisions as well as uncontrollable factors relating to
the economy and government regulations. Many
regulators believe that ROA is the best measure to
assess bank efficiency.
Return on Assets (ROA) is formulated as follows:
=
Where, before tax profit is calculated for each
month from the corresponding quarterly data. In
addition, internal determinants are derived from
balance sheets and income statements. The following
is the definition which some of the internal
determinants or variables are utilized in this study:
Table l: Definition and Description of Variables.
Variables
Descrpiptions
Return on Asset
(ROA)
The ratio of before-tax profit to
total assets. It captures all sources
of income.
Third party funds
(TPF)
comprising current accounts,
savings accounts and investment
accounts as a percentage of total
assets, and generated from wadiah
(safe custody or deposit) demand
deposits, mudarabah savings
deposits and mudarabah
investment deposits
Income from
financing
activities (IFIN)
a percentage of total financing, and
generated from margin income and
profit-sharing for the bank
Income from
service activities
( ISA)
a percentage of total revenue. It is
generated from service fees
Overhead cost
(OHC)
a percentage of total assets,
consisting of employee expenses,
general and administrative
expenses
Interest-free
earning assets
(EA)
a percentage of total assets,
comprising current accounts and
placement with other banks,
securities and other receivables,
financing facilities, investment in
shares of stock, and commitment
and contingencies liabilities that
carry credit risk
Financing ratio
(FR)
Ratio of net loans to total assets.
Net loan is calculated as gross
financing minus provision for non-
performing financing (NPF). The
variable is used to capture risk
preference.
Total assets (TA)
It is the sum of the value of equity
and liability. The variable is used to
capture possible scale economy
Equity ratio (ER)
Ratio of equity to total assets. It
captures the impact of leverage.
Due to using panel data, this study have to follow
some stages conducted to get the reseach findings.
Among other stages are Pooled Ordinary Least
Square Model (POLS), Random Effect Model (REM)
and Hausman test.
POLS is employed in this research to examine the
simultaneous effects of several independent variables
on a dependent variable charted on an interval scale.
It is the basic approach employed in estimating the
panel data.
Random Effect Model (REM) known as variance
components model is also employed in this study. In
REM, it is assumed that the dataset being analyzed
consists of a hierarchy of different populations whose
differences related to that hierarchy.
Contradicting to the REM, Fixed Effect Model
(FEM) represents the observed quantities in terms of
explanatory variables that are all treated as non-
random. FEM will be employed as an alternative if
the REM method is not suitable for the analysis. In
this stage, Hausman test is used to determine whether
to choose Random Effects or Fixed Effects for the
analysis.
4 RESULTS AND DISCUSSION
This section provides empirical evidence on the
determinants of profitability in the Indonesian Islamic
Banking industry. A broad description of the
characteristics of the variables used in the study is
given in table 1 which reports their mean, maximum,
minimum and standard deviation. Next, the results of
regression of the return on asset variables are reported
respectively. The table include several specifications,
with the basic specification including a set of bank
characteristic variables. The estimation technique is
the balanced panel data regressions.
Table 2: Summary statistics of the variables used in the empirical analysis
Variables
Mean
Maximum
Minimum
Std. Dev.
ROA
1.256032
6.930000
-7.900.000
1.530952
TPF
10166722
55767955
113722.0
14624335
IFIN
688507.6
5583342.
4819.000
1034954.
ISA
119438.7
1192864.
620.0000
231643.8
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
270

OHC
75194.71
533459.0
589.0000
122267.0
EA
11246648
59474376
223588.0
15708092
FR
0.178153
0.415667
0.000000
0.128987
TA
11792916
61810295
0.000000
16018682
ER
0.157448
0.651311
0.000000
0.129654
The analysis starts with the test conducted to
examine either the POLS or Fixed Effect Model can
be used for further analysis. Based on redundant test,
the p-value of chi square is less than 0.05. It means
that the model is significant at 5% and thus, supports
the rejection of the null hypothesis. Consequently, the
panel data (fixed effect) estimation will be used in this
study.
The next step of the study is conducting a
Hausman Test. This test is theoretically performed to
examine either Random Effect Model (REM) or
Fixed Effect Model (FEM) using panel data analysis.
Table 3 shows the p-value of chi square is 0.000 less
than 0.05. It means that the model is significant and,
thus rejected the null hypotesis. The results of thistest
are given by the table 3.
Table 3: Correlated Random Effects - Hausman Test
Test Summary
Chi-Sq. Statistic
Chi-Sq. d.f.
Prob.
Cross-section random
78.599347
8
0.0000
Being given that the model tested comprises 8
explanatory variables (K = 8), these statistics follow
Chi two to (8) degrees of freedom. The tests of
specification of Hausman show that our regression is
fixed effect.
As a result, FEM will be used in this study. In
addition, the Least Square Dummy variables (LSDV)
estimation has been performed by taking the quarter
(collectively) as one of the independent variables.
The quarter has become the sixth independent
variable and has been taken into the model. The
regression results in Table 4 are based on the fixed
effects model.
Table 4: Result of Regression Fixed Effect Model.
Varibles
Coefficient
Std. Error
t-Statistic
Prob.
C
-9.891563
2.553825
-3.873235
ln(TPF)
-1.272348
0.566626
-2.245480
0.0269*
ln(IFIN)
0.040079
0.178213
0.224894
0.8225
ln(ISA)
0.228545
0.090472
2.526142
0.0131*
ln(OHC)
-0.266615
0.139917
-1.905520
0.0595**
ln(EA)
1.390011
0.606149
2.293185
0.0239*
ln(FR)
0.038334
0.077761
0.492969
0.6231
ln(TA)
0.524602
0.229336
2.287484
0.0242*
Ln(ER)
0.100769
0.164731
0.611716
0.5421
Number of obs
120
DW stat
1.591691
R-squared
0.642355
F-statistic
11.56218
Prob>F
0.000000
*sig at 5%, **sig at 10%
From the results in Table 4, the fixed effects
coeffcients of the regressors indicate how much
profitability changes when there is a change in the
capital of each bank, bank size, expenses
management, leverage, overheads, financing and
liquidity in Islamic banking system. From Table 4,
the overall regression is statistically significant, F =
11.56, p = .001, thus supporting the fact that Third
Party Funds (TPF), Income from Financing Activities
(IFIN), Income from Service Activities (ISA),
Overhead Cost (OHC), Interest-Free Earning Assets
(EA), Financing Ratio (FR) Total Asset (TA) and
Equity Ratio (ER) are important factors in
determining the profitability of the Islamic banks in
The Impact of Banks Characteristics Variables on Indonesian Islamic Banks Profitability
271

Indonesia. The coefficient of multiple determinations
(R
2
), which indicates goodness of fit of the model,
shows that about 64.24% of the changes in
profitability of the Islamic banks in Indonesia are
caused by the combined influence of the independent
variables of internal bank characteristics. With a
value of 64.24%, the strong positive relationship
between profitability and its determinants is further
confirmed. The results of the Durbin Watson
Statistics of 1.59 indicates that there is no
autocorrelation among the variables included in the
model, making the model more reliable.
Out of eight independent variables, five are
significant. The results show that Third Party Funds
(TPF), Income from Service Activities (ISA),
Interest-Free Earning Assets (EA) and Total Asset
(TA) are significant at the 5 % significance level.
While Overhead Cost (OHC) is significant at 10%.
Income from Service Activities (ISA), Interest-Free
Earning Assets (EA) and Total Asset (TA) have a
positive relationship with the dependent variable,
return on asset. On the other hand, Third Party Funds
(TPF) and overhead cost (OHC) determines the
Return on Assets (ROA) negatively.
The negative relationship between the ROA and
Third Party Funds (TPF) means that 1% increase in
thirds farty funds will cause the level of profit to
decrease about 1.27 %. This negative effect conforms
to the theory that the increased third party funds is
normally associated with decreased firm profitability.
The positive relationship between the ROA and
Service Activities (ISA) means that 1% increase in
Income from service activities will cause the level of
profit to increase about 0.229 %. This postive effect
conforms to the theory that the increased income from
services activities is normally associated with
increased firm profitability. Incomes from service
activities are positive and significant for the
profitability indicator. It shows us that ISA
contributes in a big portion on the profit of the bank.
There is a negative relationship between between
the ROA and (Overhead Cost) OHC. It means that 1%
increase in the overhead cost will cause the level of
profit to decrease to about 0.2667 %. OHC variable is
found to have a significant and negative relationship
with profitability indicators. This negative
relationship between the ROA and OHC indicates
that the contribution of Over Head cost to their
average cost has reducing profitability. We can
interpret the relationship of OHC and profitability
indicators in two ways: first, it indicates quite good
expenses management since this promotes good
performance; second, it could also be interpreted that
the more profitable the bank the higher salary
expenses will be.
The significant and positive relationship between
the ROA and Interest-Free Earning Assets (EA)
means that 1% increase in earning assets will cause
the level of profit to increasee about 1.390. This
finding is in line with the findings of Demirguc-Kunt
and Huizinga (1997) and Bashir (2000). This
particular result indicates Islamic banks could utilize
their productive assets to enhance their performace.
Financing over total assets (FR) is insignificant on
profitability (ROA). But it consistent with the
findings of previous literature, which found a positive
relationship with profitability measures. The positive
relationship between FR and profitability indicator as
found in this study indicates that the Islamic bank
portfolio slightly affect short-term trade-based
financing. As such, these financing are low risk and
only contribute modestly to bank profits.
The coefficient of total assets (TA) is positively
related to profitability (ROA). This may indicate that
Islamic banks with high equity capital can boost the
confidence of their customers, thereby leading to
higher revenue. The positive coefficient on total
assets indicates the presence of economies of scale.
Banks of large size enjoy scale economy and achieve
higher revenue.
Despite Equity Ratio (ER) not having significant
impact on profitability ratios, it is found to have
positive relationship with ROA. This fit with earlier
researches, which had found a positive relationship
between capital ratio and profitability. Previous
studies of the determinants of bank profitability in the
United States found a strong and statistically
significant positive relationship between (ER) and
profitability. This supports the view that profitable
banks remain well capitalized; or the view that well-
capitalized banks enjoy access to cheaper (less risky)
sources of funds with subsequent improvement in
profit rates (see Bourke, 1989). The insignificant
impact of ER on profitability measures shows us that
the equity is a small proportion of total assets.
Income from financing activities (IFIN) is one
variables which has insignificant impact on Islamic
banks profitability. However, it is found to have
positive relationship with ROA. This confirms the
findings of Haron (1996) which had found a positive
relationship between Income from financing
activities and profitability. The unsignificant impact
of IFIN variable shows that financing activities in
Islamic banking in indonesia is still less productive.
Put differently, Islamic banks have not not been keen
to rely on financing activities which for the most part
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
272

consist of murabahah (resale with mark-up) and
mudharabah (PLS scheme) financing .
5 CONCLUSION
This study has attempted to empirically investigate
the determinants of profitability in case of an Islamic
bank. Regression analysis was applied to examine
which variables are actually significant in
determining the profit of Islamic banks in Indonesia
over the periode 2010 and 2013 in quarterly basis.
This study suggests that five of eight banks
characteristics are important factors in explaining the
variation of profitability for Islamic banking
institutions in Indonesia. Among other significant
factors, Income from Service Activities (ISA),
Interest-Free Earning Assets (EA) and Total Asset
(TA) have a positive relationship with the dependent
variable, return on asset. On the other hand, Third
Party Funds (TPF) and overhead cost (OHC)
determines the Return on Assets (ROA) negatively.
Based on above result findings, three sources of
funds for Islamic banks are negatively related with
profitability indicator. This result particularly may be
utilized by the management of Islamic banks to
review and reassess the performance of these sources
of funds in order to increase their profitability level.
Furthermore, Overhead Cost (OHC) also
influence banks’profitability negatively. It prove that
the contribution of OHC to their average cost has
reducing profitability.
Total Asset (TA), on the other hand which has
positive relationship with profitability indicator. It is
also the most significant variable under our
consideration. This particular result is in line with
other major research findings, which state that Banks
of large size enjoy scale economy and achieve higher
revenue.
The ratio of interest-free earning assets to total
assets (EA) affects profitability positively. It implies
that Islamic banks are keen to rely on interest free-
earning asset to enhance their profitability since the
bulk of the earnings of banks come from interest-free
activities.
Moreover, the positive impact of increased
income from services activities on profitability
indicates that Islam banks so far has an important role
in as sources of revenue. It is contradict with
financing as the main source of income, according to
result finding has insignicant impact on
banks’profitability. It is told that Islamic banks tend
to experience a loss situation when they are offering
financing scheme particularly mudarabah schemes.
Based on the regression result, it can be concluded
that interest free earning assets is the most important
factors bank characteristic in determining of the
performance of Islamic banks in Indonesia since the
bulk of the earnings of Islamic banks come from
interest-free activities.
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APPENDIX
Appendix 1: The Least Square Dummy variables (LSDV) estimation.
Coefficient
Std. Error
t-Statistic
Prob.
C(1)
-10.62443
2.790897
-3.806814
0.0002
C(2)
-1.272348
0.566626
-2.245480
0.0269
C(3)
0.040079
0.178213
0.224894
0.8225
C(4)
0.228545
0.090472
2.526142
0.0131
C(5)
-0.266615
0.139917
-1.905520
0.0595
C(6)
1.390011
0.606149
2.293185
0.0239
C(7)
0.038334
0.077761
0.492969
0.6231
C(8)
0.524602
0.229336
2.287484
0.0242
C(9)
0.100769
0.164731
0.611716
0.5421
C(10)
1.910926
0.599499
3.187537
0.0019
C(11)
-0.205403
0.242696
-0.846340
0.3993
C(12)
-0.437626
0.504198
-0.867965
0.3874
C(13)
1.085328
0.583927
1.858670
0.0659
C(14)
1.660428
0.478820
3.467746
0.0008
C(15)
1.493818
0.425260
3.512720
0.0007
C(16)
0.568239
0.434548
1.307654
0.1939
C(17)
0.875965
0.482159
1.816755
0.0722
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274

Appendix. 2. Wald Test:
Equation: Untitled
Test Statistic
Value
df
Probability
F-statistic
9.824918
(8, 103)
0.0000
Chi-square
78.59935
8
0.0000
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