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THE RELATIONSHIP BETWEEN HUMAN CAPITAL INVESTMENT, NON- PERFORMING FINANCING AND PROFITABILITY
Corresponding Author(s) : Hasan Mukhibad
Humanities & Social Sciences Reviews,
Vol. 8 No. 1 (2020): January
Abstract
Purpose of the study: This research aims to identify the influence of good corporate governance (GCG) mechanisms and human capital investment (HCI) on non-performing financing (NPF) and profitability. In addition, we examine the relationship between NPF and profitability.
Methodology: The research samples are commercial Islamic banks in Indonesia (13 banks) that were determined by using a purposive sampling method. The data are collected from the banks’ financial statements and GCG reports, from 2012 to 2016. Structural Equation Modeling (SEM) was employed to analyze the data.
Main Findings: Our study shows that the number of directors a bank has significantly affected NPF but does not affect profitability, while the size of the independent Board of Commissioners (BoC) has a significant influence on NPF and profitability. Sharia Supervisory Board also has a role in improving profitability. HCI has a significant effect on profitability, but it does not affect NPF.
Applications of this study: Islamic banks are urged to improve their implementation of GCG, especially for their ratio of independent commissioners and HCI expenditure. Independent commissioners and HCI are able to reduce the level of NPF and improve performance. HCI expenditure should be viewed as an investment by the bank, and not as a cost. Investment in HCI is proven to improve profitability.
Novelty/Originality of this study: The use by researchers of the HCI variable to influence NPC is still limited. The reason is that the main source of a bank’s income is from financing (loans), so the highest risk for the bank is NPF. To reduce NPF, the bank’s employees must have the ability to manage risk.
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- Abdul-rahman, A., & Nor, S. M. (2016). Challenges of Profit-and-Loss Sharing Financing in Malaysian Islamic Banking. Malaysian Journal of Society and Space 12, 2(2), 39–46.
- Acedo, F. J., Barroso, C., & Galan, J. L. (2006). The Resource-Based Theory: Dissemination and Main Trends. Strategic Management Journal, 27, 621–636. https://doi.org/10.1002/smj.532 DOI: https://doi.org/10.1002/smj.532
- Al-Ghazali, M. (2012). The Impact of Investments in Human Resources Activities on the Effectiveness of Investment in Human Capital : The Case of Commercial Banks in Jordan. International Journal of Business and Social Science, 3(18), 253–261.
- Al-wesabi, H. A. H., & Ahmad, N. H. (2013). Credit risk of Islamic banks in GCC countries. International Journal of Banking and Finance, 10(2), 8. DOI: https://doi.org/10.32890/ijbf2013.10.2.8476
- Alam Choudhury, M., & Nurul Alam, M. (2013). Corporate governance in Islamic perspective. International Journal of Islamic and Middle Eastern Finance and Management, 6(3), 180–199. https://doi.org/10.1108/IMEFM-10-2012-0101 DOI: https://doi.org/10.1108/IMEFM-10-2012-0101
- Alandejani, M., & Asutay, M. (2017). Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter? Research in International Business and Finance, 42, 832–854. https://doi.org/10.1016/j.ribaf.2017.07.020 DOI: https://doi.org/10.1016/j.ribaf.2017.07.020
- Andriyan, O. (2010). Pengaruh Mekanisme Corporate Governance Terhadap Kinerja Keuangan Bank Perkreditan Rakyat. Jurnal Akuntansi Dan Keuangan Indonesia, 7(2), 187–204. https://doi.org/10.21002/jaki.2010.11 DOI: https://doi.org/10.21002/jaki.2010.11
- Anggraeni. (2016). The Determinant of Indonesia’s Islamic Rural Banking Risk Taking. International Business Management, 10(13), 2541–2546.
- Anisykurlillah, I., & Mukhibad, H. (2016). A Financial Report Model For Traditional Market Traders To Increase Mudharabah Financing In Baitul Maal Wattamwil (BMT). Review of Integrative Business and Economics ResearchOnline, 5(1), 219–228.
- Arouri, H., Hossain, M., & Muttakin, M. B. (2014). Effects of Board and Ownership Structure on Corporate Performance Evidence from GCC Countries. Journal of Accounting in Emerging Economies, 4(1), 117–130. https://doi.org/10.1108/JAEE-02-2012-0007 DOI: https://doi.org/10.1108/JAEE-02-2012-0007
- Asri, M. (2017). Effect of Human Resource on Financial Performance of Islamic Bank in Indonesia. IOSR Journal of Business and Management, 19(12), 32–35. https://doi.org/10.9790/487X-1912013235
- Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108 DOI: https://doi.org/10.1177/014920639101700108
- Bayraktar, O., & Şencan, H. (2017). Employees’ Approaches to Human Resources from the Asset-Resource Concepts Perspective. International Journal of Business and Social Science, 8(9), 116–127. Retrieved from www.ijbssnet.com
- Beiner, S., Drobetz, W., Schmid, F., & Zimmermann, H. (2003). Is Board Size an Independent Corporate Governance Mechanism? (No. 89).
- Cheema, K. U. R., & Din, M. S. (2013). Impact of Corporate Governance on Performance of Firm : A Case Study of Cement Industry in Pakistan. MPRA-Munich Personal RePEc Archive, 53202(53202). https://doi.org/10.12691/jbms-1-4-1
- Dixon, R., & Stratling, R. (2013). Corporate Governance and Corporate Social Responsibility Disclosure : Evidence from the US Banking Sector. https://doi.org/10.1007/s10551-013-1929-2 DOI: https://doi.org/10.1007/s10551-013-1929-2
- Du, X., Yin, J., & Hou, F. (2018). Auditor human capital and financial misstatement: Evidence from China. China Journal of Accounting Research, 11(4), 279–305. https://doi.org/10.1016/j.cjar.2018.06.001 DOI: https://doi.org/10.1016/j.cjar.2018.06.001
- Dzulkarnain, A. R., & Asrori. (2017). The Effect of Financing Risk on Sharia Compliance Performance and Profitability. Accounting Analysis Journal, 6(3), 336–346.
- Ernawati, E. (2016). Risk of Profit Loss Sharing Financing: the Case of Indonesia. Al-Iqtishad: Journal of Islamic Economics, 8(1), 101–116. https://doi.org/10.15408/aiq.v8i1.2511 DOI: https://doi.org/10.15408/aiq.v8i1.2511
- Heenetigala, K. (2011). Corporate Governance Practices and Firm Performance of Listed Companies in Sri Lanka. Victoria University.
- Huda, A. N. (2012). The Development of Islamic Financing Scheme for SMEs in a Developing Country: The Indonesian Case. Procedia - Social and Behavioral Sciences, 52, 179–186. https://doi.org/10.1016/j.sbspro.2012.09.454 DOI: https://doi.org/10.1016/j.sbspro.2012.09.454
- Laryea, E., Ntow-gyamfi, M., Alu, A. A., Laryea, E., Ntow-gyamfi, M., & Alu, A. A. (2017). Non-performing Loans and Bank Profitability: Evidence from An Emerging Market. African Journal of Economic and Management Studies, 7(4), 462–481. https://doi.org/10.1108/AJEMS-07-2015-0088 DOI: https://doi.org/10.1108/AJEMS-07-2015-0088
- Lips, H. M. (2013). The Gender Pay Gap: Challenging the Rationalizations. Perceived Equity, Discrimination, and the Limits of Human Capital Models. Sex Roles, 68, 169–185. https://doi.org/10.1007/s11199-012-0165-z DOI: https://doi.org/10.1007/s11199-012-0165-z
- Mollah, S., & Zaman, M. (2015). Shari ’ ah supervision, corporate governance and performance: Conventional vs. Islamic banks. JOURNAL OF BANKING FINANCE, 58, 418–435. https://doi.org/10.1016/j.jbankfin.2015.04.030 DOI: https://doi.org/10.1016/j.jbankfin.2015.04.030
- Nawaz, T. (2017). Momentum investment strategies, corporate governance and firm performance: An analysis of Islamic banks. Corporate Governance (Bingley), 17(2), 192–211. https://doi.org/10.1108/CG-03-2016-0052 DOI: https://doi.org/10.1108/CG-03-2016-0052
- Nawaz, T. (2019). Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks. Journal of Business Ethics, 157(2), 567–587. https://doi.org/10.1007/s10551-017-3694-0 DOI: https://doi.org/10.1007/s10551-017-3694-0
- Norman, N. M., Haron, R., & Hassan, R. (2017). Bank Performance and Shari’ah Supervisory Board Attributes of Islamic Banks: Does Bank Size Matter ? Journal of Islamic Finance, 6(Special Issue), 174–187. https://doi.org/10.12816/0047348 DOI: https://doi.org/10.12816/0047348
- Ogilo, F. (2016). Effects of Financial Instruments on Performance of Islamic Banks in Kenya. The International Journal of Business & Management, 4(8), 40–45.
- Ongena, S., & Smith, D. C. (2001). The Duration of Bank Relationships. Journal of Financial Economics, 61, 449–475. https://doi.org/10.1016/S0304-405X(01)00069-1 DOI: https://doi.org/10.1016/S0304-405X(01)00069-1
- Pathan, S., & Faff, R. (2013). Does board structure in banks really affect their performance? Journal of Banking and Finance, 37(5), 1573–1589. https://doi.org/10.1016/j.jbankfin.2012.12.016 DOI: https://doi.org/10.1016/j.jbankfin.2012.12.016
- Pivac, S., Barać, Ž. A., & Tadić, I. (2017). An analysis of human capital investments, profitability ratios and company features in the EU. 8, 167–180. https://doi.org/10.17535/crorr.2017.0010 DOI: https://doi.org/10.17535/crorr.2017.0010
- Purbaningsih, R. Y. P. (2014). The Effect of Liquidity Risk and Non-Performing Financing (NPF) Ratio to Commercial Sharia Bank Profitability in Indonesia. International Proceedings of Economics Development and Research, 57–61. https://doi.org/10.7763/ipedr DOI: https://doi.org/10.7763/ipedr
- Quttainah, M. A., & Almutairi, A. R. (2017). Corporate Ethics: Evidence From Islamic Banks. Journal of Management & Governance, 21(4), 815–840. https://doi.org/10.1007/s10997-016-9360-6 DOI: https://doi.org/10.1007/s10997-016-9360-6
- Rehman, R. U., & Mangla, I. U. (2010). Corporate Governance and Performance of Financial Institutions in Pakistan : A Comparison between Conventional and Islamic Bank in Pakistan. The Pakistan Development Review, 49(4 (Part II)), 461–475. https://doi.org/10.30541/v49i4IIpp.461-475 DOI: https://doi.org/10.30541/v49i4IIpp.461-475
- Setyawati, I., Suroso, S., Suryanto, T., & Nurjannah, D. S. (2017). financial Performance of Islamic Banking better ? Panel Data Estimation. European Research Studies Journal, XX(2), 592–606. https://doi.org/10.35808/ersj/661 DOI: https://doi.org/10.35808/ersj/661
- Siswantoro, D. (2014). Analysis of Islamic Bank’s Performance and Strategy After Spin-off as Islamic Full-fledged Scheme in Indonesia. Procedia - Social and Behavioral Sciences, 164, 41–48. https://doi.org/10.1016/j.sbspro.2014.11.048 DOI: https://doi.org/10.1016/j.sbspro.2014.11.048
- Tadić, I., Barać, Ž. A., & Plazonić, N. (2015). Relations between Human Capital Investments and Business Excellence in Croatian Companies. International Journal of Mechanical and Industrial Engineering, 9(3), 850–855.
References
Abdul-rahman, A., & Nor, S. M. (2016). Challenges of Profit-and-Loss Sharing Financing in Malaysian Islamic Banking. Malaysian Journal of Society and Space 12, 2(2), 39–46.
Acedo, F. J., Barroso, C., & Galan, J. L. (2006). The Resource-Based Theory: Dissemination and Main Trends. Strategic Management Journal, 27, 621–636. https://doi.org/10.1002/smj.532 DOI: https://doi.org/10.1002/smj.532
Al-Ghazali, M. (2012). The Impact of Investments in Human Resources Activities on the Effectiveness of Investment in Human Capital : The Case of Commercial Banks in Jordan. International Journal of Business and Social Science, 3(18), 253–261.
Al-wesabi, H. A. H., & Ahmad, N. H. (2013). Credit risk of Islamic banks in GCC countries. International Journal of Banking and Finance, 10(2), 8. DOI: https://doi.org/10.32890/ijbf2013.10.2.8476
Alam Choudhury, M., & Nurul Alam, M. (2013). Corporate governance in Islamic perspective. International Journal of Islamic and Middle Eastern Finance and Management, 6(3), 180–199. https://doi.org/10.1108/IMEFM-10-2012-0101 DOI: https://doi.org/10.1108/IMEFM-10-2012-0101
Alandejani, M., & Asutay, M. (2017). Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter? Research in International Business and Finance, 42, 832–854. https://doi.org/10.1016/j.ribaf.2017.07.020 DOI: https://doi.org/10.1016/j.ribaf.2017.07.020
Andriyan, O. (2010). Pengaruh Mekanisme Corporate Governance Terhadap Kinerja Keuangan Bank Perkreditan Rakyat. Jurnal Akuntansi Dan Keuangan Indonesia, 7(2), 187–204. https://doi.org/10.21002/jaki.2010.11 DOI: https://doi.org/10.21002/jaki.2010.11
Anggraeni. (2016). The Determinant of Indonesia’s Islamic Rural Banking Risk Taking. International Business Management, 10(13), 2541–2546.
Anisykurlillah, I., & Mukhibad, H. (2016). A Financial Report Model For Traditional Market Traders To Increase Mudharabah Financing In Baitul Maal Wattamwil (BMT). Review of Integrative Business and Economics ResearchOnline, 5(1), 219–228.
Arouri, H., Hossain, M., & Muttakin, M. B. (2014). Effects of Board and Ownership Structure on Corporate Performance Evidence from GCC Countries. Journal of Accounting in Emerging Economies, 4(1), 117–130. https://doi.org/10.1108/JAEE-02-2012-0007 DOI: https://doi.org/10.1108/JAEE-02-2012-0007
Asri, M. (2017). Effect of Human Resource on Financial Performance of Islamic Bank in Indonesia. IOSR Journal of Business and Management, 19(12), 32–35. https://doi.org/10.9790/487X-1912013235
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108 DOI: https://doi.org/10.1177/014920639101700108
Bayraktar, O., & Şencan, H. (2017). Employees’ Approaches to Human Resources from the Asset-Resource Concepts Perspective. International Journal of Business and Social Science, 8(9), 116–127. Retrieved from www.ijbssnet.com
Beiner, S., Drobetz, W., Schmid, F., & Zimmermann, H. (2003). Is Board Size an Independent Corporate Governance Mechanism? (No. 89).
Cheema, K. U. R., & Din, M. S. (2013). Impact of Corporate Governance on Performance of Firm : A Case Study of Cement Industry in Pakistan. MPRA-Munich Personal RePEc Archive, 53202(53202). https://doi.org/10.12691/jbms-1-4-1
Dixon, R., & Stratling, R. (2013). Corporate Governance and Corporate Social Responsibility Disclosure : Evidence from the US Banking Sector. https://doi.org/10.1007/s10551-013-1929-2 DOI: https://doi.org/10.1007/s10551-013-1929-2
Du, X., Yin, J., & Hou, F. (2018). Auditor human capital and financial misstatement: Evidence from China. China Journal of Accounting Research, 11(4), 279–305. https://doi.org/10.1016/j.cjar.2018.06.001 DOI: https://doi.org/10.1016/j.cjar.2018.06.001
Dzulkarnain, A. R., & Asrori. (2017). The Effect of Financing Risk on Sharia Compliance Performance and Profitability. Accounting Analysis Journal, 6(3), 336–346.
Ernawati, E. (2016). Risk of Profit Loss Sharing Financing: the Case of Indonesia. Al-Iqtishad: Journal of Islamic Economics, 8(1), 101–116. https://doi.org/10.15408/aiq.v8i1.2511 DOI: https://doi.org/10.15408/aiq.v8i1.2511
Heenetigala, K. (2011). Corporate Governance Practices and Firm Performance of Listed Companies in Sri Lanka. Victoria University.
Huda, A. N. (2012). The Development of Islamic Financing Scheme for SMEs in a Developing Country: The Indonesian Case. Procedia - Social and Behavioral Sciences, 52, 179–186. https://doi.org/10.1016/j.sbspro.2012.09.454 DOI: https://doi.org/10.1016/j.sbspro.2012.09.454
Laryea, E., Ntow-gyamfi, M., Alu, A. A., Laryea, E., Ntow-gyamfi, M., & Alu, A. A. (2017). Non-performing Loans and Bank Profitability: Evidence from An Emerging Market. African Journal of Economic and Management Studies, 7(4), 462–481. https://doi.org/10.1108/AJEMS-07-2015-0088 DOI: https://doi.org/10.1108/AJEMS-07-2015-0088
Lips, H. M. (2013). The Gender Pay Gap: Challenging the Rationalizations. Perceived Equity, Discrimination, and the Limits of Human Capital Models. Sex Roles, 68, 169–185. https://doi.org/10.1007/s11199-012-0165-z DOI: https://doi.org/10.1007/s11199-012-0165-z
Mollah, S., & Zaman, M. (2015). Shari ’ ah supervision, corporate governance and performance: Conventional vs. Islamic banks. JOURNAL OF BANKING FINANCE, 58, 418–435. https://doi.org/10.1016/j.jbankfin.2015.04.030 DOI: https://doi.org/10.1016/j.jbankfin.2015.04.030
Nawaz, T. (2017). Momentum investment strategies, corporate governance and firm performance: An analysis of Islamic banks. Corporate Governance (Bingley), 17(2), 192–211. https://doi.org/10.1108/CG-03-2016-0052 DOI: https://doi.org/10.1108/CG-03-2016-0052
Nawaz, T. (2019). Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks. Journal of Business Ethics, 157(2), 567–587. https://doi.org/10.1007/s10551-017-3694-0 DOI: https://doi.org/10.1007/s10551-017-3694-0
Norman, N. M., Haron, R., & Hassan, R. (2017). Bank Performance and Shari’ah Supervisory Board Attributes of Islamic Banks: Does Bank Size Matter ? Journal of Islamic Finance, 6(Special Issue), 174–187. https://doi.org/10.12816/0047348 DOI: https://doi.org/10.12816/0047348
Ogilo, F. (2016). Effects of Financial Instruments on Performance of Islamic Banks in Kenya. The International Journal of Business & Management, 4(8), 40–45.
Ongena, S., & Smith, D. C. (2001). The Duration of Bank Relationships. Journal of Financial Economics, 61, 449–475. https://doi.org/10.1016/S0304-405X(01)00069-1 DOI: https://doi.org/10.1016/S0304-405X(01)00069-1
Pathan, S., & Faff, R. (2013). Does board structure in banks really affect their performance? Journal of Banking and Finance, 37(5), 1573–1589. https://doi.org/10.1016/j.jbankfin.2012.12.016 DOI: https://doi.org/10.1016/j.jbankfin.2012.12.016
Pivac, S., Barać, Ž. A., & Tadić, I. (2017). An analysis of human capital investments, profitability ratios and company features in the EU. 8, 167–180. https://doi.org/10.17535/crorr.2017.0010 DOI: https://doi.org/10.17535/crorr.2017.0010
Purbaningsih, R. Y. P. (2014). The Effect of Liquidity Risk and Non-Performing Financing (NPF) Ratio to Commercial Sharia Bank Profitability in Indonesia. International Proceedings of Economics Development and Research, 57–61. https://doi.org/10.7763/ipedr DOI: https://doi.org/10.7763/ipedr
Quttainah, M. A., & Almutairi, A. R. (2017). Corporate Ethics: Evidence From Islamic Banks. Journal of Management & Governance, 21(4), 815–840. https://doi.org/10.1007/s10997-016-9360-6 DOI: https://doi.org/10.1007/s10997-016-9360-6
Rehman, R. U., & Mangla, I. U. (2010). Corporate Governance and Performance of Financial Institutions in Pakistan : A Comparison between Conventional and Islamic Bank in Pakistan. The Pakistan Development Review, 49(4 (Part II)), 461–475. https://doi.org/10.30541/v49i4IIpp.461-475 DOI: https://doi.org/10.30541/v49i4IIpp.461-475
Setyawati, I., Suroso, S., Suryanto, T., & Nurjannah, D. S. (2017). financial Performance of Islamic Banking better ? Panel Data Estimation. European Research Studies Journal, XX(2), 592–606. https://doi.org/10.35808/ersj/661 DOI: https://doi.org/10.35808/ersj/661
Siswantoro, D. (2014). Analysis of Islamic Bank’s Performance and Strategy After Spin-off as Islamic Full-fledged Scheme in Indonesia. Procedia - Social and Behavioral Sciences, 164, 41–48. https://doi.org/10.1016/j.sbspro.2014.11.048 DOI: https://doi.org/10.1016/j.sbspro.2014.11.048
Tadić, I., Barać, Ž. A., & Plazonić, N. (2015). Relations between Human Capital Investments and Business Excellence in Croatian Companies. International Journal of Mechanical and Industrial Engineering, 9(3), 850–855.