Analysis of The Profitability of Islamic Banking Using Arimax Model and Regression with Arima Errors Model

Abstract

Profitability of Islamic banking is a benchmark for the performance of Islamic bank. Indicators for measuring the profitability of Islamic banking is ROA. There are several predictor variables involved that affect the profitability of Islamic banking, namely interest rates, exchange rates and inflation. This research was aimed to predict the effect of predictor variables on Islamic bank profitability using two approaches namely ARIMAX and ARIMA errors. Both model approaches are conceptually the combination between the regression model and ARIMA model. The best model of the two approaches will be compared by considering the MAPE value. The best model is reflected by the smallest SBC value, significant parameter estimator, and the smallest MAPE value. As a result, the approach model of ARIMA (1, 1, 1) error with variable of exchange rate was found to be the best model with MAPE value of 32.013%, while the model of ARIMAX (0, 1, 2) with exchange rate variable obtained MAPE value of 375.78%. Thus, the best model to predict the effect of predictor factor on Islamic banking profitability was ARIMAX model (0,1,2) with exchange rate variable.