Explaining Profitability in Indonesian Islamic Banks: The Role of Capital Adequacy, Financing Risk, and Liquidity

Abstract

This study analyzes the effect of Capital Adequacy Ratio (CAR), Non-Performing Financing (NPF), and Financing to Deposit Ratio (FDR) on profitability (Return on Assets/ROA) of Islamic commercial banks in Indonesia during the period 2021-2025. Using panel data from five leading Islamic banks (Bank Syariah Indonesia, Bank Muamalat Indonesia, Bank BCA Syariah, Bank Mega Syariah, and Bank BTPN Syariah), this study applies panel data regression with the Fixed Effects method selected through the Hausman Test. The estimation results show that CAR has a positive and highly significant effect on ROA (β = 0.2997, p < 0.01), with an elasticity of 0.30%. NPF does not significantly affect ROA in the Fixed Effects model (β = 0.1093, p = 0.1021), although it shows a strong bivariate correlation. FDR has a positive and significant effect on ROA (β = 0.0249, p < 0.05), with an elasticity of 0.025%. The Fixed Effects model shows excellent goodness of fit with R² = 0.9954, indicating that 99.54% of the variation in profitability can be explained by the independent variables and individual bank heterogeneity. This finding confirms the importance of capital and liquidity management in driving sustainable profitability in the Indonesian Islamic banking industry.