The Nexus Between Operational Risk and Profitability in Islamic Banking

This paper aims to demonstrate the effect of operational risk on profitability in Islamic banks. The total of 14 Islamic banks in Indonesia for the period of 2016-2018 are selected to be the sample of this study. Operational risk is measured using cost to income ratio and cost to total asset ratio, meanwhile profitability is calculated by return on average asset and return on average equity. Bank’s size, which is measured by log of total asset, is used as the control variable in this study. The findings show that the appropriate model in this study is Pooled OLS model and operational risk, which is measured by cost to total asset, is found to be positively related to profitability. This shows that the higher operational cost incurs by Islamic bank, the better the management of their risk.

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