THE EFFECT OF PROFIT SHARING FINANCING ON PROFITABILITY WITH NON PERFORMING FINANCING (NPF) AS AN INTERVENING VARIABLE

Abstract

Financing is one of the banking products that plays a crucial role in enhancing a bank's profitability. However, besides its benefits, financing can also increase the risk of Non-Performing Financing (NPF), which may negatively impact profitability. Therefore, this study aims to analyze the effect of profit-sharing financing on profitability with NPF as an intervening variable in Islamic commercial banks in Indonesia during the 2015-2019 period. This study utilizes secondary data obtained from the annual reports of Islamic commercial banks. The sampling technique used is purposive sampling, resulting in a sample of 11 Islamic commercial banks over five years. Data analysis is conducted using the Structural Equation Modeling-Partial Least Squares (SEM-PLS) method with SmartPLS software. The findings indicate that profit-sharing financing has a positive and significant effect on profitability. Additionally, profit-sharing financing also has a positive and significant effect on NPF. Furthermore, NPF has a negative and significant effect on profitability. These results suggest that while profit-sharing financing can boost a bank's profitability, the associated increase in NPF can be a risk factor that needs to be carefully managed. Therefore, bank management must implement effective risk mitigation strategies to balance financing growth and asset quality, ensuring optimal profitability.