The Role of CAR as a Mediating Variable in the Impact between NPF and FDR on ROA of Islamic Banks

This study investigates the mediating role of Capital Adequacy Ratio (CAR) in the relationship between Non-Performing Financing (NPF), Financing-to-Deposit Ratio (FDR), and Return on Assets (ROA) in Indonesian Islamic banks. Addressing conflicting findings in prior literature, we employ Partial Least Squares Structural Equation Modelling (PLS-SEM) to analyze quarterly financial data (2021–2024) from all four Islamic banks listed on the Indonesia Stock Exchange (n = 64 reports). Results demonstrate that NPF negatively impacts CAR (β=-0.539, p<0.001) and directly reduces ROA (β=2.294, p<0.001), while FDR shows no significant effects on either CAR (β=-0.277, p=0.093) or ROA (β=-0.242, p=0.127). Crucially, CAR fully mediates the NPF-ROA relationship (β=4.194, p<0.001), explaining 67.2% of CAR variance (R²=0.672) and 38.4% of ROA variance (R²=0.384). These findings highlight CAR's dual role as both a regulatory buffer and profitability stabilizer in Islamic banking, contrasting with conventional banking models where liquidity (FDR) typically influences performance. The study advances theoretical understanding of Sharia-compliant risk management by demonstrating how profit-sharing mechanisms decouple liquidity from profitability. For practitioners, results emphasize prioritizing asset quality over liquidity metrics in Islamic bank strategy. Future research should incorporate governance and macroeconomic variables to enhance model explanatory power.