Implications of Net Stable Funding Ratio (NSFR) on Islamic Bank Margins and Earning Management Practices

The Regulation of Financial Service Authority Regulation (POJK 50/POJK/03/2017) regarding the obligation to fulfill the Net STABLE Funding Ratio (NSFR) aims to increase financial stability as well as to create Healthy banking System. Based on that regulation banks are required to meet an NSFR ratio of more than 100%. Islamic bank face challenges in complying with that regulation, because the funding instruments of Islamic Bank have shoter tenor compared to conventional ones, while sukuk as long-term instruments, still have limited liquidity in the Indonesian sukuk market. Based on agency theory, the preasure on profitability creates a stong incentif for managers to engage in earning management as strategic response. This study aims to investigate the impact of NSFR on Islamic Bank Margin (IBM) and also examine the impact of NSFR on Earning Management practices in Islamic Banking. This papaer also investigates the role of IBM in mediating relationship between NSFR and Earning Management. The data are collected from in Islamic Banking in Indonesia for the period of 2017 to 2024. Data processing technique used Panel Data Regression with Generalized Method of Moment (GMM). The result of this study shows that NSFR has a significant positive effect on IBM. Banks which have better liquidity tend to have better IBM. The second result is NSFR has a significant negative effect on EM practices. This funding shows that Islamic banks which have better liquidity tend to reduce EM practices. IBM play a partial mediating role in the relationship between NSFR and EM. IBM acts as a transmission mechanism between NSFR and EM.