Impulse Response Function (IRF) Analysis of Non-Performing Financing (NPF) to Internal and External Economic Shocks: Evidence from an Islamic Bank in Indonesia

The development of the Islamic banking industry in Indonesia has shown significant progress, yet it continues to face challenges, particularly with respect to Non-Performing Financing (NPF). At Bank Bukopin Syariah, NPF exhibited substantial volatility between 2016 and 2023, rising notably in 2018 and peaking at 4.95% in 2020, close to Bank Indonesia’s threshold of 5%. This study analyzes the influence of the Financing to Deposit Ratio (FDR), Cost to Income Ratio (CIR), Inflation, and BI Rate on NPF over the 2016–2023 period. Employing a quantitative approach with time-series data and the VAR/VECM model, the analysis reveals that in the short term (lag 1 and 2), none of the variables significantly impact NPF. However, in the long term, FDR and CIR have a positive and significant effect on NPF, indicating that increased financing activity and operational inefficiency elevate the risk of default. Similarly, Inflation and BI Rate also positively and significantly influence NPF, reflecting the external macroeconomic pressures contributing to deteriorating financing performance. The Impulse Response Function (IRF) analysis shows fluctuating responses of NPF to shocks from these variables, suggesting that NPF is dynamically influenced by both internal and external factors. Notably, NPF itself is the most dominant variable affecting its trajectory. While self-dependence is most evident in the short term, the roles of BI Rate, CIR, and Inflation grow stronger in the long run. These findings underscore the need for Islamic banks to implement adaptive and forward-looking risk management strategies to mitigate long-term credit risks.