THE EFFECT OF EXCHANGE RATES, INFLATION AND BI RATES ON PROFITABILITY IN ISLAMIC COMMERCIAL BANKS DURING THE 2016-2022 PERIOD

A bank is a place to distribute and to raise the public funds. In addition, banks also provide payment services to the public. The main goal of a bank is to obtain profitability. This trial purpose to examine the effect of inflation, exchange rate


A. Introduction
Bank is the center of the community's economy because it cannot be separated from transactions in the bank 1 .Banks, as financial institutions whose one of their duties are to collect public funds, must have a source to collect funds before they are distributed back to the community 2 .Islamic banks began to develop as an answer from economic groups and Muslim banking expounder who sought to oblige the insistence of many parties who wanted sanction solution in line with the Islamic Sharia principles 3 .Islamic banks do not use interest or usury applications when conducting business 4 .Islamic banking operates based on the Al-Hadith and Qur'an and Islamic sharia.Islamic banks were initially created in responses to the demands of many parties who wanted to deal services in line with Islamic Sharia and economic groupings and Muslim banking practitioner who attempted to meet their demands 5 .Muslims are expected to master the growth of Islamic banks and develop them if they are in a position as managers of Islamic banks who need to carefully identify all existing or potential partners for the improvement of Islamic banks.
Islamic banks are beginning to be known to the public.Sourced from Sharia Banking Statistics data published on the official website of the Otoritas Jasa Keuangan (OJK) in 2022, there are 14 Islamic Commercial Banks and 20 Islamic Business Units in Indonesia.According to the data, the total assets allowed by Sharia Commercial Banks every year have continued to grow, especially since the establishment of Bank Syariah Indonesia (BSI), which was formed in early 2020 as a result of the affiliation of three state-owned Sharia Commercial Banks (PT.Bank BRI Syariah, PT.Bank BNI Syariah, and PT.Bank Syariah Mandiri).
According to the 2022 Sharia Banking Statistics (SPS) report, the total assets of sharia banking have risen annually.In 2016, sharia banking had total assets of 254,184, which increased to 288,027 in 2017, 316,691 in 2018, 397,073 in 2019,   441,769 in 2020 and 2021, and reached 461,969 in 2022.Additionally, the number of sharia banking offices has increased every year from 2016 to 2022, with a slight decrease in 2022 compared to 2021, from 2,035 offices to 1,811 offices.
The expansion of Islamic banks in Indonesia is very good.This matter shows that the efficiency of Islamic banking is growing rapidly and has a positive impact on stakeholders, the government, investors, the public or for the bank itself6 .For the government, the existence of Islamic banks has the potential to boost the nation's economy.For investors, if the development of Islamic banks is positive and significant, current investors and potential investors will be more interested in providing capital to Islamic banks because of the dividend payments and the promising future prospects of banks.In addition, the presence of Islamic banks can improve public welfare because it provides burdensome interest-free financing options.From the bank's own side, increasing profitability and strong financial performance are indicators of a business that continues to be increasingly established7 .
Optimizing profits is banks' main goal.The banks' rising profits suggest that it adequately explains their financial performance.The profitability of a bank is assessed using the Return on Assets (ROA) ratio.Because Bank Indonesia grade profitability in its capacity as a regulator and bank supervisor.The utilization of a bank's profits and assets is directly correlated with the return on assets, which should be higher 8 .
According to the research conducted Nadzifah & Sriyana Inflation is one of the main factors affecting profitability.Facing these challenges and risks, Bank Indonesia (BI) and the government have strengthened synergy and implemented various policy mixes, while prioritizing macroeconomic stability and continuing to promote structural reforms to strengthen economic fundamentals.The policy mix adopted by the BI is directed at efforts to achieve the inflation target, reduce the current account deficit to a healthier level, and support financial system stability 11 .The tendency of the prices of general goods to increase gradually is known as inflation.Bank profitability is significantly negatively affected by inflation12 .Research conducted by Alim and Utomo13 stated that inflation affects profitability.In contrast, Nadzifah and Sriyana; Prastowo et al14 has no effect on ROA because when inflation increases, banks' profits will experience a significant decrease.
Exchange rate is the second element that affects profitability.The extent of local currency, or Rupiah, is needed to buy a unit of international currency sometimes referred to as the exchange rate of a currency or foreign currency.
According to Hidayati and Nadzifah and Sriyanal 15 , because the exchange rate depreciates and appreciates, it affects banking profitability.In addition, According to Alim 20 research, it suggests that the inflation variable has a positive and insignificant impact on Return on Assets (ROA), which means that as the inflation value increases, the value of ROA also increases, albeit at not significant.On the other hand, the BI Rate variable has a negative and insignificant impact on Return on Assets (ROA).It is caused by the increase in BI Rate affects the operational activities of Sharia Banks in terms of financing and distribution of funds, leading to a decrease in income and profits of Sharia Banks, although not significantly.

Research Dwijayanthy et al 21 also indicates that inflation affects bank
profitability by impacting operational expenses, which increase as the inflation rate rises, and the real interest rate decreases, resulting in a decrease in people's desire to save in banks.The BI Rate has no effect on bank profitability, and its influence should not differ from the influence of inflation on bank profitability, as the BI Rate is a policy made in response to changes in the inflation rate.The currency exchange rates have proven a negative impact on bank profitability, indicating that if the currency experiences appreciation or depreciation, it will affect bank profits.
Based on the background and inconsistency of previous research, this study empirically examines the result of exchange rates, inflation, and the BI rate on the profitability of Indonesian Sharia commercial banks.This research differs from previous research in that the author included an additional research object 19 Mufidhoh, Andriyanto, and Haerudin, "Analisis Pengaruh Inflasi, Suku Bunga, Dan Nilai Tukar Terhadap Kinerja Bank Syariah BUMN"; Prima, Aprilianto, and Frida, "Profitabilitas Bank Umum Syariah Di Indonesia." 20Alim, "Analisis Pengaruh Inflasi Dan Bi Rate Terhadap Return on Assets (Roa) Bank Syariah Di Indonesia," 2014. 21Febrina Dwijayanthy and Prima Naomi, "Analysis of Effect of Inflation, BI Rate, and Exchange Rate on Bank Profitability (Period 2003-2007)," Karisma 3, no. 2 (2009): 87-98.
and utilized a different time frame, specifically the years 2016-2022.This analysis uses a time-series data approach, in which some previous studies used panel data.

B. Research Method
Quantitative research was used in this trial.The data used were secondary data with a causal associative approach, that is, research that purpose to control the relation between two or more variables.A causal relation consists of influencing and affecting variables.Secondary data obtained by researchers include data from the internet, journals, and books that complement their research.The data analysis used was a various linear regression analysis with time-series data.Time series type secondary data processing is processed by VAR modeling 22 The completion of time series type secondary data processing with VAR modeling is as follows: Stationerity test (ADF), Determination of optimal lag, VAR Stability Test, Causality test, Cointegration test, VAR estimation, Impulse Response Function and Decomposition. 23is study examines whether there is an affect between the Exchange Rate, Inflation and BI Rate on ROA, so that the regression equation is: In Indonesia, Islamic banks are referred to as Islamic banks, which are financial firm that run their operations in accordance with sharia law.
An islamic bank is a financial institution that collects funds and is

Profitability
Profitability is the competense of an enterprise to make a profit within a certain period.Profitability shows the company's ability to make a net income from the assets used and provides supporting evidence regarding the company's competense to make a net profit and the extent of the effectiveness of the company's management 24 The assessment of banking profitability in this analysis used the Return on Assets (ROA) ratio.The bank's ROA level shows its management's ability to manage its funding to be channeled to potential and safe financing sectors. 25The ROA formula from Alim 26 is as follows.

The Exchange Rate
The exchange rate is a quotation of the market price of a foreign currency in the domestic currency price (domestic currency), or the reciprocal, that is, the price of domestic currency in a foreign currency.The conversion rate of money is used in variety of transactions, such as international trade, tourism, international investment, and short-term transfers between nations that cross legal or geographical boundaries.It also symbolizes the exchange rate between one currency to another 27 .

Inflation
Inflation is the process of continuously rising average product costs.
This does not mean that the prices of various types of goods rise by the same percentage.Perhaps, this increase may not coincide.An increase that occurs only once (albeit by a fairly large percentage) is not inflationary.The price increases were measured using a price index.There are three kinds of price indices used to calculate the rate of inflation, namely the Consumer Price Index (CPI), the Producer Price Index (IHP) and the Large Trade Price Index (IHPB) 28 .

BI Rate
The BI Rate is an interest rate that reflects the attitude or substance of the publicly disclosed monetary policy adopted by Bank Indonesia.The Bank Indonesia board of governors announces the BI Rate once a month on the board of governors meeting, and Bank Indonesia uses it to perform monetary operations using liquidity control in the money market in order to meet operational goals for the monetary policy. 30The development of the economy reflects the monetary policy's operational gpal of the Overnight Interbank Money Market Interest Rate (PUAB O/N).This movement in the developments are anticipated to be tracked through the interbank rate in the deposit rate, and in turn, the lending rate in the banking industry.

Secondary Data Processing (Time series / VAR)
The time series data model can be analyzed by looking at the lag value of the explanatory variable as a regressor or by considering the lag in the residual, and using the autoregressive (AR) model.As for the important assumption that is not present in cross-sectional regression, namely the variables in the model must have a property called stationarity.In this study, we used simple time-series data processing, namely, vector autoregressive

Data Stationarity Test
In the Stationarity Test (ADF), we compared stationarity at level, 1 st difference and 2 nd difference is the data stationary at the level or level of difference?Judging from the critical value of DF, if the probability value is greater than alpha (> 0,05), then there is a root unit problem in the autoregression model, or vice versa if the probability value is smaller (< 0,05) than the data being stationary.

Tabel 1. Stationarity Test
In this study, the data is tested at the 1st difference and 2nd difference levels, because the stationarity test at the level produces time series data that is not stationary.So, the output above produces the following data; Inflation and ROA variables are stationary at the 2nd difference level, while the exchange rate and BI rate variables are stationary at the 1st difference level.

Determination of the Optimal Lag
After determining the maximum lag of a stable VAR model, we can determine the optimal lag based on the criteria used.Some of the criteria for determining the optimal lag include the sequential modified likelihood ratio Based on the output above, it can be seen that the most signs (*) are on lag 4, so the largest LR value and the smallest AIC, SC, HQ, and FPE values are on lag 4, so lag 4 will be used for further data processing.

VAR Stability Test
The stability of the model can be observed from the modulus values in the AR root table.If the entire AR value is less than one, then the model is stable.In the output above, it turns out that there is a modulus that is more than 1, such that the model is unstable.However, it can be seen that the overall data has no problems, so in this model the data can be said to be stable.

Causality Test (Granger Causality)
In the causality test, it is known that the one with the causality relationship is the one with a smaller probability value than alpha 0.05, so H0 will be rejected later, which means that one variable will affect another variable.The Granger causality method is used to test the existence of a The Effect of Exchange Rates … significant effect of the Exchange Rate on Inflation but not vice versa (no causality).
f. ROA does not affect the Exchange Rate (0.1222 > 0.05) and the Exchange Rate does not affect the ROA (0.0911 > 0.05).

Cointegration Test (Johansen)
The purpose of the cointegration test is to determine whether the nonstationary variables are cointegrated.The concept of cointegration was proposed by Engle and Granger (1987), as a linear combination of two or more non-stationary variables produces a stationary variable.If Johansen's cointegration test has a probability value (<0.05), then there is a cointegrating equation, which means it has a long-run equilibrium.If cointegration exists, the equation must be solved using the Vector Error Correction Model (VECM) method but if not co-integrate the equation must be solved using VAR Difference.

Tabel 5. Cointegration Test
From the output results above it is known that the probability value (> 0.05).Thus, the variables did not co-integrate.It means there is no relationship between long-term balance stability and long-run equilibrium among inflation, BI rate, exchange rate, and ROA.In this case, there is no cointegration, so the test was continued by the regular VAR.

VAR estimation
In the previous discussion, the data is known to be un-cointegrated so that the estimation is sufficient to use VAR at 1st difference.Here is the analysis on the effects of exchange rates, inflation, and the BI rate on ROA.

Tabel 6. VAR Estimation
When comparing the sig values of 0.09853* < 0.1, and 0.06837* < 0.1 mean that H0 is rejected and Ha is accepted, it can be interpreted that there is a significant influence on the BI rate and inflation on ROA.Moreover, the exchange rate has no effect on ROA by comparison of sig values 0.78364 > 0.1.

Effect of Kurs on Profitability
The results show that the exchange rate (currency exchange rate) did not have a significant effect on profitability.This statement can be proven

The Effect of Inflation on Profitability
The results of this study show that inflation has a positive and significant influence on the profitability of Indonesian banks.This statement can be proven by comparing the sig values of 0.06837* < 0.1.Inflation increased, but the profit obtained by Islamic banks did not decrease significantly, and vice versa.If inflation falls, Islamic banks' profits do not increase significantly.This research is in line with research that has been carried out by Mufidhoh et al 32 which states that inflation has a significant effect on profitability.

Effect of BI Rate on Profitability
The results show that the BI rate has a positive and significant influence on the profitability of Indonesian banks.After analyzing, the following conclusions can be drawn: 1.The exchange rate has a negative effect on profitability (ROA) in Islamic banking in Indonesia, it shows that an increase in the exchange rate has no impact on ROA because Islamic banking is able to manage excess liquidity in USD.
2. Inflation has a significant positive effect on profitability (ROA) in Islamic banking in Indonesia, it shows that the greater the value of inflation, the more value of ROA will increase significantly because the Islamic banking system does not embrace the interest system, so that the money managed does not experience too much instability.

BI Rate has a significant positive effect on profitability (ROA) in Islamic
Banking in Indonesia, it shows that rising interest rates will have an impact on banking operations in financing and channeling funds.The impact is a reduction in income or profit of Islamic banking in Indonesia.
distributed to the public according to the fundamentals of Islamic law, where business activities and financial products are carried out in accordance with the Qur'an and Hadith.According to UU No. 21 of 2008, Chapter 1 Alinea (1), Sharia banking is concerned with islamic banks and sharia business units, including institutions, commercial operations, and techniques processes in which they do their business.Chapter 1, Alinea (7) of UU No. 21 of 2008 Indicates that Islamic banks which can be classifield as Islamic Comercial Bank or Islamic people's financing bank are those that conduct their busines operation in accordance with Islamic principles.
by comparing the sig values of 0.78364 > 0.1.The exchange rate is the price of the domestic currency against the foreign currency.Exchange rate fluctuations and expectations of high Rupiah depreciation fluctuations result in bank debtors experiencing business difficulties, with the subsequent consequence of not being able to pay debts to the bank.As a result, banks experienced liquidity difficulties, and ultimately, the profitability of Islamic banks decreased.This research is in line with the research that has been carried out by Mufidhoh et al 31 .
9 found that Inflation, Exchange Rate, Birate, GDP and Internal Bank Performance affect Profitability in Islamic and Conventional Banking.Meanwhile, research conducted by Alim 10 also stated that inflation and BI rate against Return on Asset (ROA).In some of the studies above, it can be noticed that the factors that affect profitability are inflation, exchange rates, the Bi rate, GDP and Internal Performance.Based upon the effect of previous research, this study is interested in conducting research by combining exchange rate variables, inflation, and the BI rate against profitability.
Mufidhoh et al 16 mentioned that the exchange rate has no result on the ROA.BI Rate is the third element that affects profitability.The BI Rate is a publicly available tariff base set by the Bank of Indonesia.An abnormal BI Rate growth can directly affect bank development 17 .According to Hidayati and Prastowo et al 18 BI rate positively affects profitability.Additionally, Mufidhoh et al and Prima et al 19 explained since in the implementation of its business, Islamic banks do not mention to the profits rate so that the BI rate has a negative effect.

Determination of the Lag Optimal
test statistics (LR), Akaike information criterion (AIC), Schwarz information criterion (SIC), final prediction error (FPE), and Hannan-Quinn information criterion (HQ).The selection of optimal lag can be based on the largest LR value or on the smallest AIC, SIC, FPE, or HQ values.Tabel 2.
of the inflation rate on the profitability of banks because the BI rate is a policy made as a result of changes in the inflation rate.If in the BI Board of Governors meeting, it is stated that it will increase or decrease the BI rate, then most banks will change bank interest rates, and this will affect the real sector in general; this research is in line with the research conducted by Dwijayanthy and Naomi 33 .7.Impulse Response Function (IRF) AnalysisThis test describes the rate of shock of one variable against another within a certain period span, so that it can be seen how long the dependent variable responds to the shock of its independent variable.This test was conducted to determine how long ROA responds to shocks that occur in exchange rates, inflation, and BI rates.