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Islamic bank encounters a high financing risk because of scheme contract using the profit-loss sharing system leading to an agency problem. The non-performing financing of Islamic rural banks as small Islamic banks in Indonesia is above the maximum threshold and is higher than that of conventional rural banks as their competitors. This paper investigates the impact of bank characteristic variables and macroeconomic variables on the non-performing financing of Islamic rural banks. Our study employs aggregate Islamic rural banks data, spanning from January 2009 to December 2018. Non-linear autoregressive distributed lag model (NARDL) is applied to address this issue. Capital adequacy ratio obviously increases impaired financing and income diversification clearly reduces non-performing financing. More interestingly, domestic output and inflation have an asymmetric effect on non-performing financing. Economic downturns increase non-performing financing but economic upturns have no impact on non-performing financing. Meanwhile, inflation deteriorates non-performing financing but deflation does not reduce non-performing financing.

Islamic banks have the aim of providing benefit to all humankind. Therefore, to measure the performance of Islamic banks, different indicators are needed from conventional banks. One of the indicators that can be used to measure Islamic banks' performance is the Islamic performance ratio (IPR). This study aims to determine the factors that influence IPR. By employing moderated regression analysis with the panel data of 7 Islamic commercial banks during 2012-2017, this study found that several factors are significantly influencing the performance of Islamic banks as indicated by the IPR indicator. That is the return on asset ratio (ROA) which has a positive direct effect on IPR and non-performing financing (NPF) that becomes a moderating variable for the effect of financing to deposit ratio (FDR) on IPR that weakens FDR’s effect. Although the NPF does not have a direct influence on the performance of Islamic banks, Islamic banks still have to be careful with NPF, because it can reduce the effect of FDR on the performance of Islamic banks.

This research aims to analyze the relationships and effects of macroeconomic indicator variable and financial ratio on non performing financing (NPF) of sharia commercial banks in Indonesia. Data used in this research is obtained from Bank Indonesia, Central Bureau of Statistics (BPS), and Financial Services Authority (OJK). This research uses time series data from January 2010 to August 2016. This research method uses quantitative method by VAR approach through eviews program. This research showed that there was no long-run equilibrium relationship between variables of NPF, inflation, exchange rate, FDR, CAR and OER. Besides, all independent variables simultaneously affected NPF variable. Based on variable contribution on NPF shock, macroeconomic indicator variables contributed on NPF shock were inflation and exchange rate, meanwhile financial ratio variables contributed on NPF shock were CAR and OER. Seen from NPF response, only CAR variable was responded positively in the early period, meanwhile other variables were responded negative and fluctuatingly. The effects of each variable on NPF were temporary since those effects would vanish after an over-five month period. Based on causality test, there was only a one-way relationship from FDR to OERBahasa Indonesia Abstrak: Penelitian ini bertujuan untuk menganalisis hubungan dan pengaruh variabel indikator makroekonomi dan rasio keuangan terhadap non performing financing (NPF) pada bank umum syariah di Indonesia. Data yang digunakan dalam penelitian ini diperoleh dari Bank Indonesia, Badan Pusat Statistik dan Otoritas Jasa Keuangan. Penelitian ini menggunakan data time series dari bulan Januari 2010 sampai dengan Agustus 2016. Metode penelitian ini menggunakan metode kuantitatif dengan pendekatan VAR melalui program eviews. Hasil penelitian menunjukkan bahwa tidak terdapat hubungan keseimbangan jangka panjang di antara variabel NPF, GDP, Inflasi, nilai tukar, FDR, CAR, dan OER. Selain itu, seluruh variabel independe