The Effect of Financing Risk (NPF) and Operating Expenses (BOPO) on Return on Assets (ROA) in Islamic Commercial Banks

Abstract

This study examines the relationship between financing risk, operational efficiency, and profitability in Indonesian Islamic Commercial Banks. Monthly aggregate data published by the Financial Services Authority (OJK) from January 2019 to December 2023 were used, resulting in 60 observations. Return on Assets (ROA) was employed as the profitability measure, while Non-Performing Financing (NPF) and Operating Expenses to Operating Income (BOPO) served as explanatory variables. The analysis included descriptive statistics, Ordinary Least Squares regression, diagnostic tests, stationarity testing, cointegration analysis, and a first-difference regression with calendar-month fixed effects and Newey–West HAC standard errors. The benchmark regression in levels showed negative and statistically significant relationships between both NPF and BOPO and ROA. However, diagnostic tests indicated non-stationarity, heteroskedasticity, and serial correlation, while no significant cointegration relationship was identified. After correcting these statistical properties, the robust first-difference model showed that both NPF and BOPO retained negative coefficients but were not statistically significant at the 5% level. These findings indicate that financing risk and operational inefficiency are directionally associated with lower profitability, but short-run monthly changes in the two ratios do not independently explain changes in ROA. The study highlights the importance of considering time-series properties before drawing conclusions from banking financial-ratio regressions.