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The Influence of Risk Management and Firm Size Towards Profitability of

Islamic Banks in Indonesia
&
The Influence of Fundamental Analysis and Systematic Risk Towards Stock
Price of Banks in Indonesia

Research Methodology
MMT Batch 11, President University

,
Submit by : DINAR DINASTY, GABRIELLE PETRINA, GLORIA DEWI, HARITSA SALSABILA, VENITA SALSABILA
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INTRODUCTION

The Influence of Risk Management and Firm Size Towards Profitability of Islamic Banks in Indonesia

Bank is the brain of financing economic activity on the market. The failure of the bank will affect the community and the
economic stability of a country, since it has a systemic impact (Sutrisno, 2016). Financial Services Authority (OJK) of Indonesia
stated that market share of Islamic bank tumbled from 4.89% (2013) to 4.85% (2015), and even reaching down to 4.78% (April
2016). However, Islamic banks keep stable, since the Islamic banking revenue sharing system that is applied in the bank
relatively maintain its performance and is not trailed away by the soaring interest rates on deposits, which soaring so that the
operating expenses are lower than the conventional bank (Ali et al., 2012).
The higher the profits obtained by the bank, the higher the financing offered. However, there is a financing risk that can
occur, namely loss of income due to late returns. In this cases, banks may have this problem since the disproportionate data
issue where they do not have adequate data on the genuine profit of the company (Hasan and Lewis, 2007). Therefore, bank
management must be able to face risks without affecting the established principles. This research aims to explain a challenging
gap in the writing on the elements of profitability in Islamic banks, to research the risk management and profitability, to
examine the variables that will affect profitability and analyze the relation of risk management towards profitability in the
Islamic banks.
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INTRODUCTION

The influence of Fundamental Analysis and Systematic Risk towards stock price of banks in Indonesia

Investment is an asset purchased by investors which is expected to produce greater value in the future. Financial markets
are one way to invest, where buyers and sellers meet to trade the financial assets they own. Financial markets are divided
into 2, namely Capital Market and Money Market. The capital market has higher risks because it is a long-term investment
(more than 1 year). for example stocks and bonds. In contrast to the capital market, the money market has little risk because
the time period is short. for example a certificate of deposit.
To reach a success investment, investors need to do analysis. This research is using Fundamental Analysis that performed
on historical and present data to making a financial forecast by involving financial statements as the basic data. Also, the
investor should pay attention on the risk. There are 2 types of risk such as Systematic risk and Unsystematic risk.
Systematic risk (aka market/beta risk) is a risk that cannot be eliminated and caused by a macro factors like Bank
Indonesia rates, inflation, and interest rates. While Unsystematic risk is a risk caused by a micro factor that limited and feels
by related company only. This risk is could also be eliminated by diversification. The researcher of this research will focus
on analyze some variables such as debt-to-equity ratio (DER), earnings-per-share (EPS), and return on equity (ROE)
because it represents a crucial function.
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LITERATURE REVIEW
The Influence of Risk Management and Firm Size Towards Profitability of Islamic Banks in Indonesia

Risk Management in Islamic Banking Operational Risk towards Profitability of Islamic Banks

Sutrisno (2016) stated that to manage risks, shariah requires Islamic banks to share risks Conceptually, the banks will be able to work efficiently in generating a high profit,
with their clients and to encourage investors to be responsibly aware of a risk and not just due to the efficiency of the operating costs will maximize the revenue of the bank
receiving the return, such as getting their clients involved. cited in Wahab (2015).

Return on Assets (Profitability) Liquidity Risk towards Profitability of Islamic Banks

Profitability is the company’s ability to generate revenue compared to sales, total assets, The lower financing to deposit ratio shows a lack of effectiveness in the funding of
even its equity (Sartono, 2008). the bank conversely. Liquidity is a key indicator for the healthy of the bank.

Capital Risk towards Profitability of Islamic Banks Specifically, liquidity is an ability of the bank to serve a tool to make the payer will
come back for its deposit and will lend it as the loan to another costumer (Sartika,
The ideal capital adequacy ratio would increase public confidence as the owner of the
2012).
funds of the bank so that the public will have the desire more to save their money in the
bank (Hardiyanti, 2012). Firm Size towards Profitability of Islamic Banks

Financing Risk towards Profitability of Islamic Banks Sartika (2012) expressed that large size companies are expected to increase
economies of scale and reduce the cost.
A theory proposed that improve exposure to financing risk is regularly connected with
diminished company profitability. Hence, a negative relationship happens between return
on assets and financing risk (Idris et al., 2012).
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LITERATURE REVIEW

The influence of Fundamental Analysis and Systematic Risk towards stock price of banks in Indonesia

Stock Financial Ratios

According to Riyanto (2001), stock is proof of retrieval of someone in a company. Horizontal analysis evaluates the financial statement data over a period, vertical analysis
Another definition says that stock is the capital raised by a company through the issue analyzes financial statement data as a percent of a base amount, and ratio analysis gives
and subscription of share. All stock issued in the capital market are tradable, means the
the relationship among selected items of financial statement data (Weygandt, Kimmel &
investor can buy and sell the stock. Sartono (2002) said that stock price formed through
the supply demand mechanism in capital market. Kieso, 2010). Among those three analyzing tools, ratio analysis is able to generate the
information that investors need.
Stock Market Indices
Debt to Equity Ratio
Stock market index is an indicator or a reflection of a group of stocks. It measures the
value section of the group of stocks by calculating its weighted average. The Debt to equity ratio is categorized as financial solvency ratio. High debt will make a high
classification criteria may differ from one index to another. The classification may financial risk that leads to extra cautious from customers, suppliers, and investor and
consists of the liquidity of the company. other parties in doing business with a firm that may not be around for long (Brealey,
Market risk Mayers, & Allen, 2011).
There are two types of risk, systematic risk and unsystematic risk. Both of them are risk Earnings per Share
that exists in a capital market. Brealey, Mayers, & Allen (2011) says that the one that
people care about is the non-diversifiable ones, which is systematic risk or beta, because Earnings per share (EPS) are categorized as profitability ratio. Comparing net business
it is in line with the required return on asset increases. income to the equity that been invested in the business makes earnings per share has a
tendency to increase over time as the business grows, especially if the investment
Fundamental Analysis
remains the same.
There are two types of analysis, which are technical analysis and fundamental analysis.
Technical analysis uses price movements and patterns on charts to predict future price Return of Equity
movements. While fundamental analysis uses value calculated using various economic
Return on equity or known as ROE is a financial ratio that measures the profitability
factors. Fundamental analysis is performed on historical and present data, aims to making
financial forecast by involving financial statements as the basic data that can be from the common stockholders’ point of view. It shows how many percent of net income
processed into financial ratio. the company earned for each dollar invested by the owners in the form of stock.
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LITERATURE REVIEW

The influence of Fundamental Analysis and Systematic Risk towards stock price of banks in Indonesia
(Cont.)
Theoretical Framework
This research is going to analyze the influence of fundamental factors and Systematic - Hypothesis 3 : There is significance influence of return on equity towards
risk towards stock price. Independent variables consist of fundamental analysis which is stock price of banks listed on the LQ45 index.
represented fundamental factors to three ratios, which are DER, EPS, ROE and - Hypothesis 4 : There is significance influence of systematic risk towards stock
systematic risk. While dependent variable has one variable, which is stock price. price of banks listed on the LQ45 index.
- Hypothesis 5 : There is significance influence of DER, EPS Growth, ROE,
and systematic risk towards stock price of banks listed on the LQ45 index.

Hypothesis
A hypothesis (H) can be defined as a testable prediction about what you expect to happen
in your study (Ajith & Shalini, 2001). this study attempts to hypothesize (H)the
following:
- Hypothesis 1 : There is significance influence of debt to equity ratio towards
stock price of banks listed on the LQ45 index.
- Hypothesis 2 : There is significance influence of earnings-per-share towards
stock price of banks listed on the LQ45 index.
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RESEARCH METHODOLOGY
The Influence of Risk Management and Firm Size Towards Profitability of Islamic Banks in Indonesia

● Research Design From the framework we could find the hypothesis such as:
- There is significant influence of CAR towards profitability
Applying a quantitative method to investigate the hypothesis is necessary
- There is significant influence of NPF towards profitability
since the researcher will be calculating and processing data to find results and - There is significant influence of OER towards profitability
draw conclusion based on the statistical results. A population representative will - There is significant influence of FDR towards profitability
participate in the study to address an issue that is demonstrated by hypothesis - There is significant influence of RR towards profitability
testing and has been referred to the theory based on the impact of independent - There is significant influence of Firm Size towards profitability
variables toward dependent variable. - There is significant influence of CAR, NPF, OER, FDR, RR and Firm Size
towards profitability
● Theoretical Framework
Theoretical framework explains the relationship between the variables (a ● Population and Sample
model) and provides evidence for your belief that these variables are connected to This research is focused on the banking industry specifically Islamic
dependent variables. This framework consists of independent variables (CAR, Commercial Banks listed in the Indonesia Stock Exchange period 2016, the
NPF, OER, FDR, RR, Firm Size) and dependent variables (Return of Assets).
population is selected to be 12 Islamic Commercial Banks which are classified in
this sector. The following criteria for the sample size of this study as follows:

- Islamic Commercial Bank which have been go public and listed on Indonesia
Stock Exchange
- Islamic Commercial Bank which published their quarterly financial report
continuously and have their company report published in Indonesia Stock
Exchange during period of 2011 - 2016.
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RESEARCH METHODOLOGY
The influence of Fundamental Analysis and Systematic Risk towards stock price of banks in Indonesia

● Research Design ● Multiple Linear Regression

The research method applies both Quantitative and Qualitative analysis A statistical method for determining the linear connection between
method. Moreover, there are four independent variables (DER, EPS, ROE and independent and dependent variables called Multiple Linear Regression. The
Beta Risk) and one dependent variable (Stock Price) in this study. The data linear regression equation for the connection model between the independent and
collected on quarterly basis from 2011 to 2014. The secondary data are managed dependent variables is as it follows:
by using panel method (longitudinal data that were observed more than 2 periods).
A panel data should have n cases over t periods. Therefore, the total data (N) is n Y = ꞵ0 + ꞵ1X1+ ꞵ2X2 + ꞵ3X3 + ꞵ4X4 + ɛ
multiple by t.
Y is Stock Price, ꞵ0 is constant, X1 is DER, X2 is EPS, X3 is ROE, X4 is Beta
● Population and Sample Risk. while ꞵ1….ꞵ4 is coefficient and ɛ is error. From this equation, it could be
concluded if the coefficient value is positive (+) then there is a direct effect
Research population is total objects or individuals who are the characteristics between independent and dependent variable. But, if the coefficient value is
are going to be predicted. Each and every bank that registered on the LQ45 index negative (-) then it shows the negative effect where the increment of independent
makes up the study’s population. These are the six banks are actively traded on variable will result to decrease the dependent variable value.
LQ45 index:

The sample was taken by using panel data. So, it will become like:
- n cases = 6 (total bank cases)
- t period = 16 (4 years, quarter basis)
- Sample size = n x t
= 16 x 6 = 96
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SUMMARY

The Influence of Risk Management and Firm Size Towards Profitability of Islamic Banks in Indonesia

The study published in the Malaysian Journal of Consumer and Family Economics (2018) examines how risk
management and company size affect Indonesia's Islamic banks' profitability. The study adopts a quantitative
research methodology and utilizes data from the Financial Report of Bank Indonesia. To guarantee the validity and
dependability of the data, the research methodology makes use of panel regression techniques and a number of
tests.

The relationship between the independent variables—capital adequacy ratio, non-performing financing, operational
efficiency ratio, financing to deposit ratio, reserve requirement, and firm size—and the dependent variable—return
on assets—is outlined in the theoretical framework. The sample selection criteria are based on public listing and
ongoing publication of financial reports, and the population of interest consists of Islamic Commercial Banks
registered on the Indonesia Stock Exchange.

In order to address potential inaccuracies in regression analysis, normalizing variables is a key component of the
data analysis process, which entails analyzing the simultaneous and partial impacts of the independent variables on
the dependent variable. The study intends to further knowledge of risk management and profitability in the Islamic
banking industry by offering insightful information on the variables impacting the financial performance of Islamic
banks in Indonesia.

In general, this study's research approach and theoretical framework seek to clarify the intricate relationship
between risk management, firm size, and profitability in the context of Indonesian Islamic banking, providing
insightful industry insights and adding to the body of knowledge in financial economics.
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SUMMARY

The influence of Fundamental Analysis and Systematic Risk towards stock price of banks in Indonesia

The study conducted by Purwanto and Erynda Bhita Safira, affiliated with the Faculty of Business at President
University in Indonesia, delves into the examination of how fundamental analysis and systematic risk influence
the stock prices of banks in Indonesia. The research sheds light on the significant impacts of various factors
such as the debt-to-equity ratio, earnings-per-share, and return on equity on stock prices. This exploration
offers valuable insights for both investors and financial analysts seeking a deeper understanding of the
dynamics within the banking sector.
The researchers carefully selected their study population from the banking industry, focusing on entities listed
on the LQ45 index during the timeframe spanning 2011 to 2014. To ensure a robust analysis, data collection
was carried out using purposive sampling and pooling techniques. By employing these methods, the study aims
to provide a comprehensive perspective on the interplay between fundamental analysis, systematic risk, and
stock prices.
These findings have practical consequences for Indonesian banking industry practitioners, extending beyond
the confines of academia. The in-depth knowledge of the complex relationships between major elements
influencing stock prices can help investors and financial experts make better-informed decisions. In the end,
this study helps stakeholders understand the complexities of the Indonesian banking industry and adds
important insights to the financial environment.
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REFERENCES

Ali, M., Habbe, A. M., & Sabir, M. (2012). Pengaruh Rasio Kesehatan Bank Terhadap Kinerja Keuangan Bank Umum Syariah dan Bank Konvensional di Indonesia. Jurnal
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Ernst & Young. (2013). Retrieved September 10, 2014, from www.ey.com
Hardiyanti, N. (2012). Analisis Pengaruh Insider Ownership, Leverage, Profitabilitas, Firm Size, dan Dividen Payout Ratio terhadap Nilai Perusahaan. Semarang: Universitas
Diponegoro.
Hasan, M. K., & Lewis, M. K. (2007). Handbook of Islamic Banking. United Kingdom: Edward Elgar Publishing Limited.
Idris, A., Rashidah., F. A. H. A. Fadli, A. A. T. Noor, J.S. Nor, M. Rajmi & J. Kamaruzaman, (2012). Determinant of islamic banking institutions profitability in Malaysia. World
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Kasbal, Sri Wahyuni. 2012.AnalisisPengaruh CAR, NPL, LDR, NIM dan BOPO Terhadap Profitabilitas Pada Perusahaan Perbankan di Indonesia. Makassar: Universitas
Hasanuddin
Sartika, D. (2012). Analisis Pengaruh Ukuran Perusahaan, Kecukupan Modal, Kualitas Aktiva Produktif dan Likuiditas Terhadap Return On Assets (ROA). Makassar: Universitas
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Sartono, A. (2008). Manajemen Keuangan Teori dan Aplikasi. Yogyakarta: BPFE.
Sutrisno, (2016). Risk, Efficiency, and Perfomance of Islamic Banking: Empirical Study on Islamic Bank in Indonesia. Asian Journal of Economic Modelling, Volume 4, Nomor
1, 47-56
Syaichu, M., & Wibowo, E. S. (2013). Analisis Pengaruh Suku Bunga, Inflasi, CAR, BOPO, NPF Terhadap Profitabilitas Bank Syariah. Diponegoro Journal of Management,
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Wahab, (2015) Analisis Faktor-Faktor Yang Mempengaruhi Efisiensi Bank Umum Syariah Di Indonesia Dengan Pendekatan Two Stage Stochastic Frontier Aproach (Studi
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