Financial and Macroeconomic Determinants of NPF in Islamic Rural Banks of Indonesia

The high Non-Performing Financing (NPF) ratio in Islamic Rural Banks (BPRS) remains a serious problem that hinders intermediation capabilities and financial stability in the Islamic microfinance sector. This indicates that the quality of financing and risk management in BPRS is not optimal. This study aims to analyze the impact of financial and macroeconomic variables on the NPF of BPRS in Indonesia, in the short and long term, by applying the Vector Error Correction Model (VECM) approach. The study uses monthly data from January 2021 to December 2024. The analysis results show that in the short term, the Capital Adequacy Ratio (CAR), the Financing to Deposit Ratio (FDR), and inflation have a significant positive impact on NPF, while Gross Domestic Product (GDP) does not show a significant impact. On the other hand, in the long term, CAR and inflation continue to have a positive impact, while FDR and GDP do not show a significant impact. These findings emphasize the importance of improving risk management, strengthening the financing selection process, and adjusting financing strategies. Policy recommendations aim to enhance operational efficiency and implement risk mitigation measures in line with economic changes.