Finding Financing Risk Factors in Indonesian Islamic Banks: A Geographically Weighted Regression Approach

Abstract

This study aimed to measure Non-Performing Financing (NPF) factors through Gross Regional Domestic Product (GRDP), unemployment rate, office network, consumptive financing, and COVID-19 cases. Cross-section data in 34 Indonesian provinces were analyzed using Geographically Weighted Regression (GWR) through global regression confirmation. The results showed differences between the GWR and global regression. All exogenous variables have spatial variability to endogenous variables. This resulted in variations in local models influencing NPF, including in DKI Jakarta, West Java, Central Java, DI Yogyakarta, East Java, Bali, and West Nusa Tenggara Provinces. Additionally, this study has implications for bankers in mitigating credit risk by maintaining the adequacy ratio of funds and tightening the verification of prospective debtors. Bankers should also restructure financing, monitor portfolio performance, and build digital infrastructure in each regional office by considering the dynamics in the provinces. In addition, the province's representative of the Financial Services Authority and Central Bank offices must coordinate directly supervising Islamic banks in the region.