The Effect of Profit-Sharing Levels and Interest Rates of Sharia Banking on Mudharabah Financing in Sharia Commercial Banks in Indonesia

Abstract

This study aims to analyze the effect of profit sharing rates and interest rates on mudharabah financing at Islamic Commercial Banks in Indonesia for the period 2018–2024. Mudharabah financing is one of the main instruments in Islamic banking based on profit and loss sharing, but its development is still relatively low compared to other types of financing. This condition is influenced by the dynamics of the national banking system, changes in monetary policy, and competition with conventional banks in the dual banking system. This study uses a quantitative approach with the Vector Error Correction Model (VECM) method. The data used are secondary data in the form of time series obtained from the Financial Services Authority (OJK), Bank Indonesia (BI), and Islamic Banking Statistics. The analysis stages include stationarity tests, optimal lag determination, Johansen cointegration tests, VECM estimation, Impulse Response Function (IRF), and Variance Decomposition (VD). The results show that the profit sharing rate measured through the profit sharing ratio has a positive effect on increasing the volume of mudharabah financing. Meanwhile, interest rates, proxied by the BI 7-Day Reverse Repo Rate, influence mudharabah financing because they influence public preferences in selecting financing instruments in a dual banking system. These findings also indicate a long-term equilibrium relationship and short-term adjustment dynamics between the three research variables. This research is expected to contribute to the development of Islamic finance literature and serve as a consideration for Islamic banks in formulating more effective, competitive, and stable financing policies in accordance with Islamic principles.