Profitability of islamic banking in Indonesia: The role of inflation and capital market dynamics
Abstract
This study examines the impact of inflation and capital market conditions on the profitability of Islamic banking in Indonesia. Profitability is measured by Return on Assets (ROA); inflation represents macroeconomic pressure; and capital market performance is proxied by the Composite Stock Price Index (Indeks Harga Saham Gabungan, IHSG). Using monthly time-series data from June 2014 to June 2025, this research applies a linear regression model estimated with Newey–West heteroskedasticity and autocorrelation-consistent standard errors to ensure robust statistical inference. The empirical results show that inflation has a negative effect on Islamic banking profitability, although the magnitude of this effect is relatively small and only marginally significant. In contrast, capital market conditions exhibit a positive and highly significant influence on ROA, indicating that improvements in stock market performance are strongly associated with higher profitability in the Islamic banking sector. These findings suggest that Islamic banking profitability in Indonesia is more responsive to financial market dynamics than to inflationary pressures. The results highlight the growing integration of Islamic banking with the broader macro-financial environment and underscore the importance of capital market stability in supporting the sustainable performance of Islamic banks. The study provides policy-relevant insights for regulators and bank management in designing strategies to enhance resilience amid macroeconomic and financial market fluctuations.
References
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Al-Shboul, M., Maghyereh, A., Hassan, A., & Molyneux, P. (2016). Political risk and bank stability in the Middle East and North Africa region. Pacific-Basin Finance Journal, 60, 101291. https://doi.org/10.1016/j.pacfin.2020.101291
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
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Bank Indonesia. (2024). Inflation. https://www.bi.go.id/en/fungsi-utama/moneter/inflasi/default.aspx
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. https://doi.org/10.1016/j.jbankfin.2012.09.016
Bilgin, M. H., Danisman, G. O., Demir, E., & Tarazi, A. (2021). Bank credit in uncertain times: Islamic vs. conventional banks. Finance Research Letters, 39, 101563. https://doi.org/10.1016/j.frl.2020.101563
Bitar, M., Pukthuanthong, K., & Walker, T. (2017). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions and Money, 53, 227–262. https://doi.org/10.1016/j.intfin.2017.12.002
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Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. https://doi.org/10.1007/s10693-010-0089-0
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Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. The World Bank Economic Review, 13(2), 379–408. https://doi.org/10.1093/wber/13.2.379
Demirgüç-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98(3), 626–650.
Demirgüç-Kunt, A., & Levine, R. (1996). Stock market development and financial intermediaries: Stylized facts. The World Bank Economic Review, 10(2), 291–321. https://doi.org/10.1093/wber/10.2.291
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
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Ghosh, S. (2016). Macroeconomic and bank-specific determinants of bank profitability: Evidence from the Middle East and North Africa. Journal of Islamic Accounting and Business Research, 7(2), 121–140.
Hadad, M., Hall, M., Kenjegalieva, K., Santoso, W., Satria, R., & Simper, R. (2010). Bank efficiency and stock market performance: An analysis of listed Indonesian banks. Review of Quantitative Finance and Accounting, 34(3), 363–380.
Hamid, F. S. (2017). The effect of market structure on banks’ profitability and stability: Evidence from ASEAN-5 countries. International Economic Journal, 31(4), 578–598.
Haron, S., & Wan Azmi, W. N. (2008). Determinants of Islamic and conventional deposits in the Malaysian banking system. Managerial Finance, 34(9), 618–643. https://doi.org/10.1108/03074350810890
Hassan, M. K., & Bashir, A. H. M. (2003). Determinants of Islamic banking profitability. Journal of Islamic Economic Studies, 11(1), 31–57.
IMF. (2024). Indonesia: Financial Sector Assessment Program — Financial System Stability Assessment (IMF Staff Country Reports, Vol. 2024, No. 272). International Monetary Fund. https://doi.org/10.5089/9798400286438.002.A001
Iqbal, M., & Molyneux, P. (2005). Thirty years of Islamic banking: History, performance and prospects. Palgrave Macmillan.
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Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American Economic Review, 88(3), 537–558.
Naceur, S. B., & Goaied, M. (2008). The determinants of commercial bank interest margin and profitability: Evidence from Tunisia. Frontiers in Finance and Economics, 5(1), 106–130.
Newey, W. K., & West, K. D. (1987). A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55(3), 703–708. https://doi.org/10.2307/1913610
Otoritas Jasa Keuangan (OJK). (2024). Islamic Banking Statistics. Jakarta: OJK.
Risfandy, T., Tarazi, A., & Trinugroho, I. (2021). Competition in dual markets: Implications for banking system stability. Global Finance Journal, 52, 100579. https://doi.org/10.1016/j.gfj.2021.100579
Sari, D. W., et al. (2023). Comparative stability analysis of Indonesian banks: Markov Switching–Dynamic Regression for Islamic and conventional sectors. PLOS ONE. https://doi.org/10.1371/journal.pone.0299420
Setiawan, A., et al. (2021). Inflation and Islamic bank profitability: Evidence from Indonesia. Journal of Islamic Economics, 5(1), 12–25.
Stock, J. H., & Watson, M. W. (2020). Introduction to econometrics (4th ed.). Pearson.
Van Greuning, H., & Iqbal, Z. (2008). Risk analysis for Islamic banks. World Bank. https://documents.worldbank.org/curated/en/688471468143973824
Wahyono, B., et al. (2021). The effect of inflation, BI rate and exchange rate on profitability in sharia banking in Indonesia period of 2009–2019. International Journal of Economics, Law and Humanities, 2(1), 125–134. https://doi.org/10.54443/ijerlas.v2i1.127
Wahyunitasari, et al. (2024). Analysis of the influence of macroeconomic variables and internal bank performance on the profitability of Islamic banking in Indonesia. MAKSIMUM: Media Akuntansi Universitas Muhammadiyah Semarang, 15(1), 121–139.
Wooldridge, J. M. (2013). Introductory econometrics: A modern approach (5th ed.). South-Western Cengage Learning.
Zarrouk, H., Jedidia, K. B., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46–66.
Al-Shboul, M., Maghyereh, A., Hassan, A., & Molyneux, P. (2016). Political risk and bank stability in the Middle East and North Africa region. Pacific-Basin Finance Journal, 60, 101291. https://doi.org/10.1016/j.pacfin.2020.101291
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
Az-zahra, S., & Widarjono, A. (2022). Moderate inflation and Islamic banking stability in Indonesia. Journal of Islamic Economics and Finance, 8(1), 45–62.
Bank Indonesia. (2024). Inflation. https://www.bi.go.id/en/fungsi-utama/moneter/inflasi/default.aspx
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. https://doi.org/10.1016/j.jbankfin.2012.09.016
Bilgin, M. H., Danisman, G. O., Demir, E., & Tarazi, A. (2021). Bank credit in uncertain times: Islamic vs. conventional banks. Finance Research Letters, 39, 101563. https://doi.org/10.1016/j.frl.2020.101563
Bitar, M., Pukthuanthong, K., & Walker, T. (2017). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions and Money, 53, 227–262. https://doi.org/10.1016/j.intfin.2017.12.002
Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks’ soundness during the 2007–2008 financial crisis. Review of Financial Economics, 22(2), 68–77. https://doi.org/10.1016/j.rfe.2013.01.001
BPS-Statistics Indonesia. (2022). Consumer Price Index and inflation data. https://www.bps.go.id
Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. https://doi.org/10.1007/s10693-010-0089-0
Databoks/Katadata. (2023). Indonesian banks and sharia banking units show slight growth in October 2023. https://databoks.katadata.co.id
Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. The World Bank Economic Review, 13(2), 379–408. https://doi.org/10.1093/wber/13.2.379
Demirgüç-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98(3), 626–650.
Demirgüç-Kunt, A., & Levine, R. (1996). Stock market development and financial intermediaries: Stylized facts. The World Bank Economic Review, 10(2), 291–321. https://doi.org/10.1093/wber/10.2.291
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
Dodi, D., Supiyadi, D., Arief, M., & Nugraha, N. (2019). Islamic bank profitability: A study of Islamic bank in Indonesia. The Journal of Business and Social Review in Emerging Economies, 5(2), 237–248. https://doi.org/10.26710/jbsee.v5i2.763
Ghosh, S. (2016). Macroeconomic and bank-specific determinants of bank profitability: Evidence from the Middle East and North Africa. Journal of Islamic Accounting and Business Research, 7(2), 121–140.
Hadad, M., Hall, M., Kenjegalieva, K., Santoso, W., Satria, R., & Simper, R. (2010). Bank efficiency and stock market performance: An analysis of listed Indonesian banks. Review of Quantitative Finance and Accounting, 34(3), 363–380.
Hamid, F. S. (2017). The effect of market structure on banks’ profitability and stability: Evidence from ASEAN-5 countries. International Economic Journal, 31(4), 578–598.
Haron, S., & Wan Azmi, W. N. (2008). Determinants of Islamic and conventional deposits in the Malaysian banking system. Managerial Finance, 34(9), 618–643. https://doi.org/10.1108/03074350810890
Hassan, M. K., & Bashir, A. H. M. (2003). Determinants of Islamic banking profitability. Journal of Islamic Economic Studies, 11(1), 31–57.
IMF. (2024). Indonesia: Financial Sector Assessment Program — Financial System Stability Assessment (IMF Staff Country Reports, Vol. 2024, No. 272). International Monetary Fund. https://doi.org/10.5089/9798400286438.002.A001
Iqbal, M., & Molyneux, P. (2005). Thirty years of Islamic banking: History, performance and prospects. Palgrave Macmillan.
Journal of Islamic Economics Lariba. (2023). Determinants of profitability in Indonesian Islamic banks: Financial and macroeconomic insights. Journal of Islamic Economics Lariba, 9(2). https://doi.org/10.20885/jielariba.vol9.iss2.art1
Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American Economic Review, 88(3), 537–558.
Naceur, S. B., & Goaied, M. (2008). The determinants of commercial bank interest margin and profitability: Evidence from Tunisia. Frontiers in Finance and Economics, 5(1), 106–130.
Newey, W. K., & West, K. D. (1987). A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55(3), 703–708. https://doi.org/10.2307/1913610
Otoritas Jasa Keuangan (OJK). (2024). Islamic Banking Statistics. Jakarta: OJK.
Risfandy, T., Tarazi, A., & Trinugroho, I. (2021). Competition in dual markets: Implications for banking system stability. Global Finance Journal, 52, 100579. https://doi.org/10.1016/j.gfj.2021.100579
Sari, D. W., et al. (2023). Comparative stability analysis of Indonesian banks: Markov Switching–Dynamic Regression for Islamic and conventional sectors. PLOS ONE. https://doi.org/10.1371/journal.pone.0299420
Setiawan, A., et al. (2021). Inflation and Islamic bank profitability: Evidence from Indonesia. Journal of Islamic Economics, 5(1), 12–25.
Stock, J. H., & Watson, M. W. (2020). Introduction to econometrics (4th ed.). Pearson.
Van Greuning, H., & Iqbal, Z. (2008). Risk analysis for Islamic banks. World Bank. https://documents.worldbank.org/curated/en/688471468143973824
Wahyono, B., et al. (2021). The effect of inflation, BI rate and exchange rate on profitability in sharia banking in Indonesia period of 2009–2019. International Journal of Economics, Law and Humanities, 2(1), 125–134. https://doi.org/10.54443/ijerlas.v2i1.127
Wahyunitasari, et al. (2024). Analysis of the influence of macroeconomic variables and internal bank performance on the profitability of Islamic banking in Indonesia. MAKSIMUM: Media Akuntansi Universitas Muhammadiyah Semarang, 15(1), 121–139.
Wooldridge, J. M. (2013). Introductory econometrics: A modern approach (5th ed.). South-Western Cengage Learning.
Zarrouk, H., Jedidia, K. B., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46–66.
Authors
Zamilah, A. (2026). Profitability of islamic banking in Indonesia: The role of inflation and capital market dynamics. Ar-Ribhu : Jurnal Manajemen Dan Keuangan Syariah, 7(1), 84–95. https://doi.org/10.55210/arribhu.v7i1.2536
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