Factors affecting non-performing finance in Islamic banking in Indonesia’s agricultural sector

This study aims to analyze the factors affecting Islamic banks’ non-performing finance in financing Indonesia’s agricultural sector. It uses secondary data from the annual financial statements of 12 Islamic commercial banks from 2014–2022 obtained from the Indonesian Financial Services Authority. The analysis used the partial least squares-structural equation modeling method to test the relationship between independent variables: murabahah financing, mudharabah, number of bank offices, and profit-sharing non-profit investment, with non-performing finance as the dependent variable. The financing-to-deposit ratio is a mediation variable that helps understand indirect influence. The results show that financing with murabahah and mudharabah contracts does not directly influence non-performing finance but becomes significant when mediated by the financing-to-deposit ratio. In contrast, the number of bank offices and profit-sharing non-profit investments did not significantly influence non-performing finance, either directly or through financing to deposit ratio. These findings indicate that the financing-to-deposit ratio plays a key role in managing the financing risk of Islamic banks in the agricultural sector, so an optimal liquidity management strategy is essential for maintaining financial stability. The study’s implications show that Islamic banks need to manage the financing-to-deposit ratio more strategically to reduce the risk of non-performing financing. In addition, although murabahah and mudharabah financing can be the main instruments in supporting the agricultural sector, banks need to increase risk supervision so that non-performing finance remains under control. This study contributes to the Islamic banking literature by providing new insights into the role of financing-to-deposit ratio mediation in managing financing risk in the agricultural sector. AcknowledgmentThe authors would like to thank Akhmad Kusuma Wardhana from the Faculty of Environmental Management at Prince of Songkla University for helping analyze using the software and Kautsar Riza Salman from the Faculty of Economics and Business at Hayam Wuruk University for helping review so that the writing becomes better.