The efficient composition of financing in Islamic commercial banks

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UNAIR NEWS – Continuity of a business institution requires certain level of efficiency and effectiveness of its management. The Islamic commercial bank business in Indonesia is no exception. For this reason, Dr. Laila Nisful SE., M. Com ., a lecturer of FEB UNAIR conducted a study regarding the Efficient Financing Composition in Islamic Commercial Banks.

According to her, one of the main challenges of Islamic bank management is to find an efficient financing portfolio composition in Islamic commercial bank. If the bank manager made a mistake, she said, it can be fatal.

“Because each type of financing has different characteristics. There are financing contracts with high risk but also promise high returns, there are also types of financing contracts with small risk, but the benefits are also small, ” she explained.

The lecturer known well as Nisful also said, to find a balance point from the financing composition in Islamic banks, an effort was needed to obtain an optimal level of profit. However, with a rational level of risk, she explained, an efficient portfolio theory was introduced by renowned financial expert, Markowitz, from the USA.

“This theory is a modern portfolio theory that is used to analyze the formation of combined compositions from several investment instruments so it could form efficient portfolio combination points on the efficient frontier line,” she said.

About the study she and her team did, Nisful explained, she used Markowitz portfolio model and data processed with Microsoft Excel software, the Solver application. In the first stage, she emphasized the formation of an efficient portfolio composition by calculating the average profit value, standard deviation, covariance value from the whole types of investment financing.

“Then an efficient portfolio combination can be formed using the Solver application with certain constraints,” she said.

From the results of that calculation, continued Nisful, it can be concluded that the majority of ijarah financing has the smallest proportion compared to other financings. Although she said, ijarah financing return in Islamic commercial banks contributed the most.

“It happens because in this study the author uses Markowitz’s efficient portfolio theory, where the factors used as the object of the study are only focused on risk and return while other factors are ignored,” she concluded.

The study showed that Bank Syariah Mandiri has the most efficient combination of portfolio proportions compared to other banks with an expected profit rate of 11.5%, a risk level of 1.48% and the lowest variation coefficient of 0.128 consisting of 92.82% mudharabah-musyarakah financing, 0% murabahah financing, 0.86% ijarah financing and 6.32% istishna financing.

Author: Nuri Hermawan

Editor: Khefti Al Mawalia

To read more about this paper, you can see this article at:

Laila, N.; Saraswati, K. A.; Kholidah, H. 2019. Efficient portfolio composition of Indonesian Islamic bank financing, Entrepreneurship and Sustainability Issues 7(1): 34-43

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