Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of

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1 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of Muhamad Nadratuzzaman Hosen 1 and Rafika Rahmawati 2 Fakultas Syariah dan Hukum, UIN Syarif Hidayatullah Jakarta, Indonesia mnhosen@yahoo.com 1 ; fika_annaliez@yahoo.co.id 2 Abstract: Islamic banking nowadays is required to perform better in order to compete with its conventional counterpart in national and international market share pursuing to the ASEAN Economic Community (MEA) In measuring performance of a bank, there is variation of methods to do so. In this research, the measurement of Islamic banking performance can be done by analyzing the cost-efficiency, profitability level and the soundness of a bank. The purpose of this research is to foresee the financial performance of banks, especially the Islamic banking system inclusively by using the 3 methods mentioned above. The efficiency level was examined by using the SFA (Stochastic Frontier Approach), and profitability level was measured by the ratio of ROA (Return on Assets), the soundness of Islamic banking system was studied by measuring the CAMEL ratio s. The data used to do the study were annual reports of 5 Islamic Banks under study for the period of 2010 to 2013, the result showed that for the result of study of the cost of efficiency, Bank Mega Syariah was the top score which was 92.38% with the variable of Human Capital expense, margin expense, and the total of financing distributions which has a significant impact on the efficiency level. In the meantime, the profitability analysis of Bank Mega Syariah, it has a score of 2.77% for BOPO (operating expense to operating income) has a significant influence to the profitability level. For the soundness of a bank, Bank Muamalat Indonesia earned the highest score which was 84.48%, the ratio of CAR, KAP, ROA, FDR and NPF which has a significant impact to the soundness of the bank. The study found out there are some discrepancies and inconsistencies of the result for the financial performance of each analysis method. Keywords: Efficiency, SFA, Profitability, ROA, CAMEL Introductions 1. FORWORDS Moving toward to the era of Masyarakat Ekonomi ASEAN (MEA) or ASEAN Economic Community and the integration of Financial Service Industries, it will be difficult for Islamic banking to improve its 173 International Journal of Applied Business and Economic Research

2 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati financial performance. With the exposure of MEA along with the integration of ASEAN financial services, the foreign banking system will have effortless access to operate in Indonesia. The local bank should strive hard to compete with foreign banks as the foreign banks could offer a lower margin compare to local banks. To compete within the banking industry, Islamic bank is required to operate efficiently in order to gain more profit and to maximizing its productivities as well as to maintain the soundness of its financial performance. Thus, it is necessary to measure Islamic banks performance in order to find out its efficiency level, profitability and the financial soundness. In measuring the banking performance in general, there are 6 characteristics of assessment such as CAMELS (Capital, Assets Quality, Management, Earnings, Liquidity, and Sensitivity). In Indonesia, the CAMELS is being used as the indicator value of banking soundness measurement as stated in Bank Indonesia rules (Peraturan Bank Indonesia/PBI) under the rules No.6/10/PBI/2004 dated April 12, 2004 concerning the System of measuring the soundness of commercial banks, the rulest was the revision of the previous rules of measuring system, it is cited that the measurement of the soundness level of the bank is comprisedof the CAMELS indicators. Apart from the CAMELS method, banking performance is examined for the funds management of the bank. The high level of efficiency of a bank indicates the good level of bank soundness, Suseno, 2004). Efficiency is one of the performance parameters which in theory are one of the foundations of the whole performance of organizations. The ability to produce maximum output with the existing input is considered as the expected performance measurement. During the efficiency measurement bank has facing the condition of how to achieve the optimum output level for the certain input. (Hadad, 2003). According to Berger and Humprey (1992) in banking industry, in measuring the performance efficiency, there are two appraoches that is commonly used, the traditional approach and frontier approach. The traditional approach is making a comparison of the financial ratios of the bank. This approach is a partial approach that is used in CAMELS method. On the other hands, the frontier approach is a method that used asset s combinations (input-output) in standard of a particular measurement. For all this time bank performance is measured by the principles of accounting standard, which begin with return on equity (ROE), return on asset (ROA), asset turn over as well as return on permanent capital. Yet, the cost efficiency measurement from the accounting standard of the cost in-efficiency data in Bank management and from the external and internal factors that has influenced the banking cost in-efficiency is remain unknown. (Sutawijaya and Lestari, 2009). Therefore, in analyzing the soundness of a bank using the CAMELS, it is necessary to strengthen the cost efficiency analysis. As explained above, the study of the cost efficiency level, profitability, and the soundness of a bank is very important to measure financial banking performance. Islamic banking in Indonesia is continuing to develop in order to achieve the set higher market share target, thus it is necessary to manage the bank in the right order. It is resilent to manage the bank financial affairs to enable Islamic Banks to compete with its conventional counterpart. Therefore, this study will analyze the cost efficiency, profitability and the soundness of Islamic banks in Indonesia simultaneously Problem Identification (a) What is the cost efficiency level of Islamic banks in Indonesia during the period of 2010 until 2013 based on the parametric approach? International Journal of Applied Business and Economic Research 174

3 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of (b) How is the profitability level of Islamic banks in Indonesia from the period of 2010 until 2013? (c) How is the soundness level of Islamic banks in Indonesia for the period of 2010 until 2013, based on CAMEL approach? (d) (e) (f) Which input and output factors that is affected by the efficiency level of Islamic banks in Indonesia? The impact of NPF (Non Performing Financing), FDR (Financing to Deposit Ratio), BOPO (operating expenses/operating income), and CAR (Capital Adequacy Ratio)compare to the profitability (ROA) of theislamic Banks in Indonesia? How is the impact of the ratios of CAR, KAP, ROA, and FDRcompare to the ratio of CAMELofIslamic Banks in Indonesia? 1.3. The Purpose of Study (a) To analyze the value of cost efficiency ofislamic Bank in Indonesia during the period of 2010 until 2013 based on the parametric approach. (b) To analyze the profitability of Islamic Banks in Indonesia during the period of 2010 until (c) (d) (e) (f) To calculate the level of the soundness of the Islamic Banks in Indonesia during the period of 2010 until 2013 based on the method of CAMEL. To analyze the input and output factor that could influence the level of cost efficiency of the Islamic Banks in Indonesia. To acknowledge o the influence of NPF, FDR, BOPO, and CAR against the profitability (ROA) of Islamic Banks in Indonesia To acknowledge the influence of the ratio of CAR, KAP, ROA, and FDR against the ratio of CAMEL Description of Data 2. THE METHOD OF THE STUDY The objects of this study were annual reports of several Islamic Banks in Indonesia during the period of 2010 until The sources of this information were secondary data, which are the data that are acquired from the annual reports of the 5 Islamic Banks, there are: Bank Muamalat Indonesia (BMI), Bank SyariahMandiri (BSM), Bank Mega Syariah (BMS), BRI Syariah (BRIS), and Bank SyariahBukopin (BSB) for the period of 2010 until The Analysis Tools The analysis method used in this study was the quantitative method. Quantitative analysis data is in the form of analyzing data using numbers and then calculating them with statistical method, therefore the data should be classified in certain category using a particular table. 175 International Journal of Applied Business and Economic Research

4 (a) Stochastic Frontier Approach Muhamad Nadratuzzaman Hosen and Rafika Rahmawati The cost efficiency of Islamic Banks was based on the expenditure function and the calculating is using the Stochastic Frontier Approach (SFA) which is previously has calculated the deviation of expenditure function in econometric. In this study, the cost efficiency measurement of the Islamic banks were using expenditure approach, it was based on the total expenditures influenced by the function input and output variables. In this study the input (X 1 ) by using the human capital expenses (P 1 ) and margin expenses (P 2 ). In the meantime, the output (Y 1 ) is using the financing expenses (Q 1 ) and the Islamic Bonds (Q 2 ). The software of the Frontier 4.1 was used to estimate the expenditure functions by accessing the panel data method in SFA approach. (b) Calculating the Profitability Method The level of profitability of Islamic Bank is measured by the ratio of ROA (Return on Assets), which is the indicator of the ability of banking to acquire the profit derived from certain assets owned by the bank. ROA is acquired by calculating the ratio of profit after tax and the total asset. (Net income divides by total assets). (c) CAMEL Method In measuring the soundness of Islamic Bank using the CAMEL method (Capital, Assets Quality, Management, Earnings, and Liquidity). The Capital calculations was represented by the ratio of CAR, Assets Quality ratio was represented by KAP and the ratio of PPAP (financing reserved), Management performance was represented tby the ratio of NPM, Earnings was represented by the ratio of ROA and the ratio of BOPO (operating expenses to operating income), and Liquidity management was represented by the ratio of QR and the ratio of FDR. (d) Dual Regression Analysis Indifferent with other analysis, dual linear regression analysis needs the uptight requirement testing. After the dual regression linear equation is formed, there is necessary to do some classical testing, such as autocorrelations test, heterokedasticitytest and multicollinearity test. Furthermore, there will be hypothetical test, partially or simultaneously. The partial test is done by the t test and the stimulant test by the f test. In this study the performance is measured by the level of expenditure efficiency, the level of profitability (ROA), and the soundness of the bank (ratio of CAMEL), thus there are three models of equation m regression. Model (I): Cost Efficiency (CEFF) TC = a + b a1 P 1 + b a2 P 2 + b a3 Q 1 + b a4 Q 2 + e a Model (II): Profitability Return on Assets (ROA) ROA = b + b b1 NPF + b b2 FDR + b b3 BOPO+ b b4 CAR + e b Model (III): Ratio of CAMEL (CAMEL) CAMELS = c + b c1 CAR + b c2 KAP + b c3 ROA + b c4 FDR + b c5 NPM + e c International Journal of Applied Business and Economic Research 176

5 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of The Variable of Study The variable used for this study can be acknowledged on this table. Table 1 Research Variables J Variables Type Indicator Indicator Definition Scale Dependent TC Total Cost Ratio ROA Return on Assets Ratio CAMEL Bank Soundness Ratio Independent P 1 Human Capital Expenses Ratio P 2 Margin Expenses Ratio Q 1 Total Financing Ratio Q 2 Islamic Bonds Ratio DPK Deposits Ratio NPF Non Performance Financing Ratio FDR Total Deposit to Total Financing Ratio BOPO Operating Expense to Operating Income Ratio CAR Capital Adequacy Ratio Ratio KAP Qualification on Productive assets Ratio ROA Return on Assets Ratio FDR Financing to Deposit Ratio Ratio NPM Net Profit Margin Ratio 2.4. Research Hypothesis Based on the above assumption the researchers of this study have come up with Hypothesis formula, as follows: Hypothesis Model (I): H 0 = There is no impact between the input and output components against the level of expenditure efficiency of Islamic banks. H a = There is some impact between the input and output components against the level of expenditure efficiency of the Islamic banks. Hypothesis Model (II): H 0 = H 0 = There is no impact amongst DPK, NPF, and FDR against the level profitability of Islamic Banks. H a = There is some impact amongst DPK, NPF, and FDR against the level profitability of Islamic Banks. 177 International Journal of Applied Business and Economic Research

6 Hypothesis Model (III): Muhamad Nadratuzzaman Hosen and Rafika Rahmawati H 0 = There is no impact amongst CAR, KAP, ROA, and FDR against the soundness of Islamic Banks. H a = There is some impact amongst CAR, KAP, ROA, and FDR against the soundness of Islamic Banks. 3. DISSCUSSION AND CONCLUSION 3.1. The Study of Efficiency Level of Islamic Bank Data processing is done using the software of Frontier 4.1. The model formation of predicament of expenditure efficiency level for Islamic Banks can be written as follow: ln TC = 0, ,542 ln P 1 + 0,538 ln P 2 0,971 ln Q 1 + 0,109 ln Q 2 For the regression equation explained above, the TC constant is -0,267. Thus this input and output variables is assumed to be constant, therefore the Islamic banks has minimum expenditures for the certain input which is 0,7657 million from its total assets (e x 0,267 = 0,7657). For the input variables of Human Capital Expenses (ln P 1 ) with regression coefficient of 0,542 which showed that the exponent of Human Capital Expenses has experienced the increment of 1%, thus the total cost will be increased by 0,542%. This indicated that the Human Capital expenses do not produce a positive contribution for the Islamic banks, therefore the more expenditure it has spent, the total cost will be increased and will lead to in-efficiency. For the margin expense (ln P 2 ), the regression coefficient by 0,538 has showed that if the margin expenses exponent has increased by 1%, thus the total expenses will be increased by 0,538%. It indicates that the Islamic bank has not optimal in managing its existing deposits (DPK) the increment of deposits should increase the profitability of the bank, it became the burden since the bank must pay the rate of returns (profit sharing/margin expenses) for its depositors which lead to the in-efficiency for the Islamic Bank. In the meantime, for the output variable which is the total expenditures (ln Q 1 ) regression coefficient by 0,971 has shown that the total expenditure exponent has increased for 1%, thus the total cost will decrease by 0,971%. This indicates that the financing has been distributed well by Islamic bank and it has produced good returns as well. However, Islamic bank should continue to increase its productivity from its financing distribution in order to increase its efficiency level. For the Islamic Bonds owned by the bank (ln Q 2 ) regression coefficient of 0,019 has shown that the Islamic Bonds exponents has increased by 1%, thus the total expenditure has increased by 0,109%. This has shown that the Islamic Bonds has produced a lower returns compare to the cost that Islamic bank has spent for the bonds. The followings are the result of Cost efficiency level of 5 Islamic Banks using the method of SFA. International Journal of Applied Business and Economic Research 178

7 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of Table 2 Efficiency level of Islamic Banks Cost Efficiency level Period BMI BSM BMS BRIS BSB March June September December March June September December March June September December March June September December Average 0,8328 0,8796 0,9238 0,7835 0,8492 It is known that in average, the highest level of cost efficiency for Islamic Banks was Bank Mega Syariah by %, while the lowest level of cost efficiency was BRI Syariah by78.35% The outcome of the cost efficiency level using the SFA method is based on several categories. The average cost efficiency using the SFA method is 0, with deviation standard of 0, This group of the cost efficiency value of SFA is classified to four categories using the Percentile quartile ± standard deviation as follows: Table 3 The Category of Cost Efficiency Efficiency level Category < 0,65 Inefficient 0,65 0,89 Less Efficient 0,89 0,97 Fairly Efficient > 0,97 Efficient Thus, we classified the 5 Islamic Banks as follow: 179 International Journal of Applied Business and Economic Research

8 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati Table 4 The Classification of the CostEfficiency level Islamic Banks Cost Efficiency Level Classifications Bank Muamalat Indonesia 83,28% Low Bank Syariah Mandiri 87,96% Low Bank Mega Syariah 92,38% Medium BRI Syariah 78,35% Low Bank Syariah Bukopin 84,92% Low As an according to the Table above, it is assumed that Bank Mega Syariah (BMS) is one of the Islamic Banks that in this category has a medium level of Cost efficiency, which mean that BMS level of cost efficiency is good enough. In the meantime BMI, BSM, BRIS and BSB are assumed to be Islamic Banks with lower level of cost efficiency. The result showed that none of the Islamic banks has higher level of cost efficiency for the period of this study. Therefore, away forward there should be some adjustments in order to increase the efficiency performance of the Islamic Banks The impact of Input-Output Variables against the Cost efficiency of Islamic Banks As an according to the classic test (OLS test), it is assumed that the data has been distributed normally, there is no autocorrelations, heteroscedasticity, yet there are some multicollinearity issues. For the result of Model 1 regression, the explanations are as follows: (a) Adjusted R Square test (Adj R 2 ) In order to recognize how large is the independent variables simultaneously that will define the dependent variables it can be seen from how large is the dual co-efficient correlations (Adjusted R 2.) Table 5 The result of R Square test Adj R 2 R 2 BMI BSM BMS BRIS BSB Sources: Secondary Data. (b) F Test 0,987 0,988 0,998 0,926 0,964 To identify the significant of impact for all dependent variables simultaneously against the dependent variables by using the F test, which is comparing F calculations which is produce by the dual linear regression with F table with significant level of 95% ( = 5%). The following are the results of F test of each Islamic Bank: It is known that F table with the level of = 5%, df 1 = 4 and df 2 = 43, there is an F table for 2,61. In the meantime, the result of F test for each Islamic bank is acquired from F calculations for BMI 888,409, BSM 937,703, BMS 6,446, BRIS 148,221, and BSB 313,708. Thus we can conclude that the entire F calculations of Islamic Banks is greater than the F table, so that H 0 is rejected and H a is accepted. Which mean that all input and output variables has a significant impact simultaneously against the efficiency level of Islamic Banks International Journal of Applied Business and Economic Research 180

9 (c) Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of t test The t test was used to analyze the strength of correlation between each independent s and dependent variables individually. By comparing the value of t calculations with the t table which acquired from each variables by using the significant level of 95% ( = 5%). The t test for the independent variables using two ways examination thus /2 = 0,05/2 = 0,025, whereas df = n 2 = 46, therefore we acquired t table for 2,021. The following is the result of the t test for each of Islamic Banks: Table 6 The result of the t test Variables BMI BSM BMS BRIS BSB Human Cap. Exp. +* + +* +* Margin Exp. +* +* +* +* * Total Financing +* + * * +* Bonds * * * Note: * = It is shown that the significant variables level of 5% 3.3. Profitability Analysis of Islamic Bank for the Period of The profitability ratio in measuring the management effectiveness is based on the investment returns. The common indicator used in measuring the profitability of banking performance is ROA (Return on Asset) which is a ratio that show the ability of the entire existing assets which is used to obtain profit. The following is the average of profitability (ROA) level of Islamic Banks for the period of Table 7 The Profitability Level of Islamic Banks Profitability Level Period BMI BSM BMS BRIS BSB March ,48% 2,04% 3,18% 1,12% 0,65% June ,07% 2,22% 2,98% 0,97% 0,59% September ,81% 2,30% 2,47% 0,24% 0,43% Desember ,36% 2,21% 1,90% 0,35% 0,74% March ,38% 2,22% 1,77% 0,23% 0,62% June ,74% 2,12% 1,87% 0,20% 0,65% September ,55% 2,03% 1,65% 0,40% 0,51% December ,52% 1,95% 1,58% 0,20% 0,52% March ,51% 2,17% 3,52% 0,17% 0,54% June ,61% 2,25% 4,13% 1,21% 0,52% September ,62% 2,22% 4,11% 1,34% 0,61% December ,54% 2,25% 3,81% 1,19% 0,55% Cont. table International Journal of Applied Business and Economic Research

10 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati Profitability Level Period BMI BSM BMS BRIS BSB March ,72% 2,56% 3,57% 1,71% 1,08% June ,69% 1,79% 2,94% 1,41% 1.04% September ,68% 1,51% 2,57% 1,36% 0,79% December ,37% 1,53% 2,33% 1,15% 0,69% Average 1,48% 2,09% 2,77% 0,83% 0,59% It is known that the highest average of profitability level in Islamic Banks for the period of was Bank Mega Syariah for 2,77%, whilst the lowest level of cost efficiency was Bank Syariah Bukopin for 0,59%. The profitability results mentioned above, it can be classify to five categories based Bank Indonesia Rules No. 13/24/DPNP dated October 25, Table 8 Profitability Categories Profitability level Category < 0% Loss 0% 0,5% Non-Profit 0,5% 1,25% Low Profit 1,25% 1,5% Sufficient Profit >1,5% High profit Thus, all five Islamic Banks can be classified as follows: Table 9 The classification of efficiency level Islamic Bank Profitability Level Classification Bank Muamalat Indonesia 1,48% Sufficient Profit Bank Syariah Mandiri 2,09% High Profit Bank Mega Syariah 2,77% High Profit BRI Syariah 0,83% Low Profit Bank Syariah Bukopin 0,59% Low Profit As according to the above table, we may conclude BMI was fell under the category of Islamic bank that has sufficient level of profitability, whilst BSM andbms were fell under the Islamic banks with high level of efficiency; BRIS and BSB are both Islamic banks with low profitability level The Impact of NPF, FDR, BOPO, and CAR against the Profitability level of Islamic Banks Based on the standard result test (OLS test), we may conclude that data has been distribute normally, there is noautocorrelation, heteroskedasticity, and multicollinearity. Furthermore the result of regression Model II can be defined as follows: International Journal of Applied Business and Economic Research 182

11 (a) Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of Adjusted R Square (Adj R 2 ) test In order to find out how much the independent variables simultaneously could enlighten the dependent variables can be seen from how much the dual coefficient correlations or Adjusted R 2 was. Table 10 The Result of Adjusted R Square (Adj R 2 ) test BMI BSM BMS BRIS BSB R 2 0,778 0,889 0,895 0,772 0,822 Sources: Secondary Data. (b) F test To find out the significant of impact of all independent variables simultaneously by using the ftest, which is comparing the F calculations which obtained from dual linear regression with F table in significant level of 95% ( = 5%). The following is the result of F test for each of the Islamic banks. It is known that F table with level = 5%, df 1 = 4 and df 2 = 43, we will obtain F table for 2,61. In the meantime, the result of F test for each Islamic bank respectively acquired by F calculations BMI for 42,178; BSM 95,459; BMS for 101,519; BRIS for 40,880; and BSB for 55,246. Thus, it is concluded that the entire F calculations of Islamic Banks are greater than the F table, therefore H 0 is rejected and H a is accepted. Which means that all independent variables (NPF, FDR, BOPO, and CAR) has a significant impact simultaneously against the dependent variables(profitability level or ROA). (c) t test The t test is used in evaluating the strength of correlations amongst the independent variables againsteach of independent variables respectively. By comparing the value of t calculations with t table which is obtained from each variables using the significant level of 95% ( = 5%). Thetest on the independent variables by using two ways examinations thus /2 = 0,05/2 = 0,025, whereas df = n 2 = 46, therefore we obtained t t table for 2,021. The following are the result of the t test of each Islamic bank: Table 11 The t test results Variable BMI BSM BMS BRIS BSB NPF + + +* FDR * + +* BOPO * * * * * CAR * + + Note: * = it is shown the actual significant variable level of 5% The Analysis of Islamic Bank Soundness Using the Method of CAMEL The followings are the average level of Islamic banks soundness (CAMEL) on 5 Islamic Banks for the period of International Journal of Applied Business and Economic Research

12 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati Table 12 The Soundness Level of Islamic Banks The Soundness Level Period BMI BSM BMS BRIS BSB March ,00% 76,25% 81,06% 78,06% 80,58% June ,73% 76,50% 81,02% 77,02% 80,29% September ,22% 76,89% 80,06% 73,84% 79,44% December ,20% 78,42% 79,18% 74,25% 79,45% March ,31% 77,91% 79,19% 75,48% 80,58% June ,31% 78,02% 79,29% 74,87% 80,25% September ,04% 78,48% 79,16% 76,41% 79,94% December ,42% 78,01% 78,84% 75,33% 79,92% March ,65% 78,96% 81,30% 76,10% 80,43% June ,76% 79,22% 81,71% 78,87% 80,24% September ,00% 79,12% 81,65% 78,70% 80,27% December ,35% 78,69% 80,46% 78,79% 79,93% March ,96% 79,21% 81,30% 77,97% 82,44% June ,03% 77,94% 80,30% 77,97% 82,45% September ,31% 77,47% 79,72% 78,65% 80,76% December ,38% 77,30% 79,23% 79,55% 79,44% Average 81,48% 78,02% 80,22% 76,99% 80,40% It was recognized that the highest level of Islamic Banks soundness, for the period of was Bank Muamalat Indonesia with score 81, 48%. Meanwhile the lowest cost efficiency was BRI Syariah with score 76,99%. The result of Islamic banks soundness above mentioned can be divided based on the following category: The level of soundness Table 13 The Category of Islamic Bank Soundness Category 0% - 50% Poor 51% - 65% inadequate 66% - 80% Fair 81% - 100% Good Therefore the 5 Islamic Banks soundness can be classified as follow: Table 14 The classification of soundness level of Islamic Banks BUS Profitability Level Category Bank Muamalat Indonesia 81,48% Good Bank Syariah Mandiri 78,02% Fair Bank Mega Syariah 80,22% Fair BRI Syariah 76,99% Fair Bank Syariah Bukopin 80,40% Fair International Journal of Applied Business and Economic Research 184

13 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of Based on the above Table, it concluded that BMI fell into good category for Islamic bank soundness, while BSM, BMS, BRIS, and BSB are fell under fair category of Islamic banks soundness The Impact of CAR, KAP, ROA, FDR, and NPM against the level of soundness of the Islamic banks Based on the classic test assumptions (OLS test), it is assumed that data has been normally distributes, there is no autocorrelations, heteroskedasticity, yet, there is a matter of multicollinearity. Thus, the result of Model III regression can be explained as follow: (a) Adjusted R Square test (Adj R 2 ) To find out how large is the independent variables simultaneously that can be explained the independent variables which can be seen from how large is the dual coefficiency correlations (Adjusted R 2 ). Table 15 Test Result ofadjusted R Square (Adj R 2 ) BMI BSM BMS BRIS BSB R 2 0,990 0,942 0,998 0,815 0,978 Sources: Secondary Data. (b) F test In order to find out the impact of all independent variables simultaneously against the dependent variables we examined them by using the F test, which was to compare the F calculations which is produces by dual linear regression with F table whereas the significant level is 95% ( = 5%). The following are the result of F test from the 5 Islamic banks respectively: It is known that the F table with level = 5%, df 1 = 5 and df 2 = 42, the result is F table for 2,45. While the F test for each Islamic banks is acquired by F calculation BMI for 898,417; BSM 153,486; BMS 4, 26; BRIS 42,540; and BSB 424,967. Thus, we summarized that the whole F calcultions of Islamic banks is greater that the F table, therefore the H 0 is rejected and H a is accepted. This means that all Independent variables (CAR, KAP, ROA, FDR, and NPM) have the significant impact simultanousely against the dependent variables (CAMEL ratio). (c) t test The t test is used to analyze the strength of correlation for each independent variable against the dependent variable respectively. By comparing the value of t calculations with the t table which is acquired from each variables using the significant level of 95% ( = 5%). The t test on the independent variables is using two ways directions, thus /2 = 0,05/2 = 0,025, whereas df = n 2 = 46, so it will get t table for 2,021. The following is the result of the t test from each Islamic bank: 185 International Journal of Applied Business and Economic Research

14 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati Table 16 The result of the t test Variable B1MI BSM BMS BRIS BSB CAR +* * + KAP * * * * * ROA +* + * +* * FDRNPM *+* +*+ *+* + * ++* Note: * = it is shown the significant actual variable of 5% Mapping of Islamic Banks Performance for the Period of Based on the Cost Efficiency, Level of Profitability, and Banking Soundness It is known that from the 3 methodologies of calculating the financial performance of 5 Islamic banks that has been examined before, which were using the cost efficiency, profitability and banking soundness, thus the findings are: Table 17 Performance of Islamic Banks for the period of Islamic Banks Category Efficiency Category Profitability Category Banking Soundness Bank Muamalat Indonesia Low Sufficient Good Bank Syariah Mandiri Low High Fair Bank Mega Syariah Medium High Fair BRI Syariah Low Low Fair Bank Syariah Bukopin Low Low Fair From the above Table, it is known that there are some discrepancies of the result obtained amongst the efficiency, profitability and banking soundness (CAMEL). For the case of BMI, it is recognized that it has a low efficiency cost, fell under good banking soundness and has a sufficient profit. Which means that BMI has a little stressed on to manage its funds efficiently and yet it did not cut the unnecessary cost which leading to un-optimal in earning its profit, although its level of efficiency cost is low and not maximize its return on profit, BMI fell under good banking soundness. It is known that BSM has a low level of cost efficiency, with high profitability and fell under a fair bankingsoundness. It means that BSM has not managed its funds well, since it was not able to cut unnecessary costs. BSM as one of top leading Islamic banks with the highest amount of assets, it can manage its business well amongst the competitors, since BSM earned a high profitability level. Its customers preference of its Islamic Banking products, will lead to higher returns of profits. Although in the banking soundness, BSM has loosen some of the rules of compliance which is still under the appropriate boundaries. For the case of BMS it is recognized that its efficiency cost is quite low, with high profitability and fell under a fair banking soundness. It means that BMS should cut its unnecessary costs, yet it was able to have a high profit, considering it has operates quite sometime. For the banking soundness BMS should increase its banking soundness. International Journal of Applied Business and Economic Research 186

15 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of For the case of BRIS, it is known to have a low efficiency cost, it is considered to have a fair banking soundness, yet it profitability is low. It is necessary for BRIS to keep its cost efficiency low and to cut down the un-important costs in order to obtain more profit by placing its funds in profitable instruments. By keeping the efficiency cost low, it is expected that the profitability of BRIS will increase. Thus BRIS is expected to increase its banking soundness level. Lastly, in the case of BSB, it is known that it has low efficiency costs, fair in banking soundness and low profit. The result shown that BSB has not maximize its performance by cutting the unnecessary costs, BSB has a challenged to placing its funds in profitable instruments in order to gain more profit and in order to have its banking soundness. Furthermore, there are some factors which affected the 3 methodologies, which can be summarizing as follows: Table 18 Factors that affected the Islamic Banks Performance BUS Efficiency Level Profitability Level Banking Soundness Bank Muamalat Indonesia *Human Capital Exp. *FDR *CAR *Margin Expense *BOPO (operating expenses/ *KAP *Financing operating income) *ROA *Islamic Bonds *CAR *FDR *NPM Bank Syariah Mandiri *Margin Expense *BOPO (operating expense/ *CAR *Islamic Bonds operating income) *KAP *FDR *NPM Bank Mega Syariah *Human Capital Exp. *BOPO (operating expense/ *KAP *Margin Expense operating income) *ROA *Financing *FDR *NPM BRI Syariah *Margin Expense *NPF *KAP *Financing *BOPO (operating income/ *ROA *Islamic Bonds operating expense) *NPM Bank Syariah Bukopin *Human Capital Exp. *FDR *KAP *Margin Expense *BOPO (operating expense/ *ROA *Financing operating income) *NPM The discrepancies of the result of the 3 methodologies for examining of the financial performance are occurred since the 3 methodology used have a differentiation in perceptions.the financial performance of Islamic banks by measuring its cost efficiency level, it is perceived that the Islamic banks would perform better by cutting its unnecessary costs. While the financial performance measuring by profitability level, it is perceived that Islamic bank would perform well when it obtained the maximum profit. Whilst the performance of Islamic banks measuring by its soundness it is perceived that Islamic banks would have better performance as long as it manages its operations by complying with the rules of Bank Indonesia. 187 International Journal of Applied Business and Economic Research

16 Muhamad Nadratuzzaman Hosen and Rafika Rahmawati Yet ideally, Islamic banks would cut its unnecessary cost in order to gain more profit and be able to run its business as comply with Bank Indonesia rules. Therefore, the result of this research, there are some discrepancies in result of the financial performance of Islamic banks based on the 3 methodologies, thus there is necessary to analyze deeply at the five Islamic banks mentioned above. On the analysis for the cost efficiency level, it was recognized that BMS has the higher level of efficiency compared to BMI. By analyzing the composition of Deposits, BMS has smaller amount of deposits compared to BMI. Thus we considered that BMI has burden by deposits that it is become less efficient since BMI has the obligations to pay some returns on deposits not to mention that BMI are not able to manage the deposit wisely to become a good quality of assets. Moreover, the examination for the profitability level, it is known that only BSM that achieved the highest profitability level. By analyzing its total assets, BSM has the largest total assets compare to the other Islamic Banks. With that kind of assets, BSM has the ability to compete and to invest and maximize its profit. When it comes to the analysis result of cost efficiency, it is known that BMI s cost efficiency is low, yet it has a sufficient level of profitability. The phenomena occurred based on some factors, among others are the total assets was quite large, and it has high profit, yet there are some factors that such as large amount of assets is not considered as cost efficient as compared to BSM. Therefore, in order to increase its economies of scale it is imperative to increase more assets of Islamic banks. Yet, for deposits as one of the assets, is it really a profitable instruments or a liability for Islamic banks, it has to be analyzed furthermore. For the analysis of banking soundness, BMI has the highest level of banking soundness compare to the other 4 Islamic banks. The findings have some discrepancies, since BMI has a low level of efficiency, yet the profitability is sufficient, yet the banking soundness is highest compare to the others. This is happening since the banking soundness is measured by financial ratio that is standardizing accounting principles. It is proven to be truth when the banking soundness is analyze by using cost efficiency analysis measurement, there are some internal and external factors that is not affected well against the efficiency level. BMI still burden by its human capital costs and margin expense which lead to inefficiency, and if we take a good look on the ratio of banking soundness, BMI, BRIS and BSB are unaware that there are some factors which influence the results Conclusion 4. CONCLUSION AND SUGGESTIONS For the analysis of Islamicbanks efficiency level for the period of , it is recognized that the highest average of efficiency level was Bank Mega Syariah for 92,38%; followed by Bank Syariah Mandiri for 87,96%; Bank Syariah Bukopin for 84,92%; Bank Muamalat Indonesia for 83,28%; and the lowest one was BRI Syariah for 78,35%. The variables of human capital expenses, margin expense, financing and Islamic Bonds can be significantly affected toward the efficiency level of Bank Muamalat Indonesia. For Bank Syariah Mandiri only affected significantly by the margin expense and Islamic Bonds for the efficiency level. In the meantime for Bank Syariah Mega, human capital expenses, margin expenses, financing has a significant affect toward efficiency level. For BRI Syariah, margin expenses, financing and Islamic bonds has a significant affect towards the efficiency level. For Syariah Bukopin, human capital cost, margin expenses and financing has a significant affect toward the efficiency level. International Journal of Applied Business and Economic Research 188

17 Analysis of the Efficiency, Profitability and Soundness of Islamic Banks in Indonesia for the Period of For the profitability level analysis in Islamic banks for the period of , it is known that the highest average level of profitability was Bank Mega Syariahfor 2,77%; followed by Bank Syariah Mandiri 2,09%, Bank Muamalat Indonesia 1,48%; BRI Syariah 0,83%; and Bank Syariah Bukopin 0,59%. For Bank Muamalat Indonesia, ratio of FDR, BOPO, and CAR has significantly affected toward the profitability level. In the meantime, for Bank Syariah Mandiri, only the ratio of BOPO that is significantly affected the profitability level. For Bank Syariah Mega, only the ratio of BOPO that has a significant impact towards the profitability if the bank. For BRI Syariah, the ratio of NPF and BOPO has a significant impact on the profitability of the bank. Whilst for Bank Syariah Bukopin, only the ratio of FDR and BOPO that has a significant impact towards the profitability level. For the banking soundness analysis (ratio of CAMEL) for the period of , it is known that the highest average of banking soundness level was Bank Muamalat Indonesia for 81,48%; followed by Bank Syariah Bukopin for 80,40%; Bank Mega Syariah for 80,22%; Bank Syariah Mandiri 78,02%; and BRI Syariah 76,99%. For Bank Muamalat Indonesia, the ratio of CAR, KAP, ROA, FDR, and NPM has a significant impact on the banking soundness level. In the meantime, for Bank Syariah Mandiri, the ratio of CAR, KAP, and FDR has a significant impact toward the banking soundness level. For the Bank Syariah Mega, the ratio of KAP, ROA, FDR, and NPM has a significant impact toward the banking soundness of the bank. For BRI Syariah, the ratio of KAP, ROA, and NPM has a significant impact, while for Bank Syariah Bukopin, the ratio of KAP, ROA, and NPM has a significant impact toward the banking soundness level. There are discrepancies of financial performance result of Islamic banks using the method of cost efficiency, profitability level and banking soundness level Suggestions For all Islamic banks management, it is expected to continue to have a low level of cost efficiency, since some of the costs is unnecessary to be spent, this can be seen by cost efficiency that has not reach near 100%. The profitability level, the management of the bank must also increase its profit since the ROA is lower that expected. There is a need for the re-arrangement of the placement of productive assets in order to obtain higher profit. For the next researchers, the determinationof the independent variables should be a lot more and in variations so that the formula of the modes will be better. Apart from that, it is necessary to relate the level of Islamic banks liquidity. Then using additional analysis tools like Risk Base- Capital, as in line with BI rules that have the new regulation for banking soundness that excluded the CAMEL analysis and replacing it with Risk Base-capital analysis. REFERENCES Al-Tamimi, Hussein A. Hassan. (2010), Factors Influencing Performance of The UEA Islamic and Conventional National Banks.Global Journal of Bussiness Research, Volume 4 No. 2. Akhtar, Muhammad Farhan, dkk. (2011), Factors Influencing The Probability of Islamic Banks of Pakistan. International Research Journal of Finance and Economics. 189 International Journal of Applied Business and Economic Research

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