The Effect of Economic Condition and Banking Policy on Non-Performing Financing and Profitability: Evidence from Islamic Rural Banks in Indonesia

Islamic rural bank is a type of banks in Indonesia with a high level of non-performing financing. It is an important issue because will ultimately affect profit as the main goal. This study aims to examine the factors that affect nonperforming financing (NPF) at Islamic rural banks in Indonesia, those are economic conditions consisting of gross domestic product (GDP), Bank Indonesia-rate (BI-rate), and inflation, and banking. The policy consists of financial to deposit ratio (FDR) and capital adequacy ratio (CAR), and their impact on profitability. The population of this study is all Islamic rural banks in Indonesia with a sample of banks operating during 2014-2018. Panel data is analyzed using the PLS-SEM tool. The result shows that inflation as well as FDR, have a positive effect on NPF, while GDP, BI-rate, and CAR have no effect on NPF. Results also indicate that NPF has a negative effect on profitability. These results can be a consideration for bank management to control financial and pay attention to rising inflation, to overcome non-performing financing, because these two factors can be signals in control and managing to develop the profit.