Internal and external factors influencing equity based financing in Islamic banking: panel data evidence from Indonesia

Data reveals significant differences in the allocation of mudharabah and musharakah financing within Islamic banks. The importance of equity financing from Islamic banks to the community highlights the urgent need for a comprehensive understanding of the internal and external factors influencing equity financing in Islamic institutions. This study aims to examine the determinants affecting the distribution of equity financing by Islamic banks. This study attempts to analyze the determinants affecting the distribution of equity financing by Islamic banks. A total of 14 banks were selected as samples due to their complete data. Consequently, the collected annual data for seven years, from 2018 to 2024. This study identifies that internal factors influencing the distribution of mudharabah financing include the Capital Adequacy Ratio (CAR), Third Party Funds (TPF), and Non-Performing Financing (NPF), while external factors do not alter this distribution. In contrast, the allocation of musharakah financing is governed exclusively by the Bank Indonesia (BI) interest rate, with no internal factors influencing it. This conclusion suggests that Islamic banks increase mudharabah financing allocation by lowering CAR, increasing TPF, and reducing NPF. A decrease in CAR often indicates an increased capacity for investment financing. An increase in TPF will motivate Islamic banks to expand their mudharabah funding. Furthermore, efficient management of NPF will further motivate Islamic banks to improve their mudharabah financing.