Strengthening Islamic financial institutions is one element in implementing a sustainable Islamic finance ecosystem (Hidayat et al., 2021). Until now, Islamic banking has been the prevailing approach among Islamic financial institutions, operating following Sharia principles. Despite this, various alternative institutions, including insurance, capital markets, zakat organizations, and microfinance, coexist within the Islamic finance landscape. Islamic microfinance is a noticeable expansion in this context, particularly in developing and least-developed countries, with a special focus on OIC (Organization of Islamic Cooperation) nations, as highlighted by (Azmi & Thaker, 2020). The primary objective of Islamic microfinance is to alleviate poverty and enhance the quality of life for Muslims, who are its clientele, while also liberating them from financial transactions that contradict Islamic principles, such as Riba or usury, as noted by (Ginanjar & Kassim, 2019). In Indonesia, Islamic microfinance often takes the form of Sharia-compliant cooperatives, commonly referred to as Baitul Mal Wattamwil (BMT).

The development of BMT in Indonesia in the last two decades has experienced rapid growth; based on data compiled by the National Committee for Sharia Economics and Finance (KNEKS)(2019), there are around 4,500 BMTs in Indonesia. As the number of BMTs increases, so do its customers. According to Wulandari and Kassim (2016), there are some issues with financing people with low incomes in BMT: the practice of subsidy, the role of collateral, the role of joint liability, the credit-plus financing function, and the financing default case.

Undoubtedly, BMT (Baitul Mal Wattamwil) confronts a significant challenge, primarily related to the occurrence of non-performing financing. Non-performing financing occurs when customers cannot fulfill their payment commitments for installments or credit payments under the agreed-upon schedule (Lisa et al., 2022). This situation leads to a scenario in which customers fall short of meeting their expected payments, resulting in the classification of their credit as suboptimal or delinquent (Riduwan et al., 2021). According to June 2023 data from the Financial Services Authority (OJK) (2023), Indonesia reported 1.73 trillion cases of non-performing financings.

Nonperforming financings substantially impact the evaluation of BMT's performance and financial ratios. Implementing specific handling and operational standards to manage non-performing financings and minimize their adverse effects on financial reports is crucial. These efforts should be carried out with a primary focus on upholding Sharia values when addressing these issues. BMT must prioritize sound financial principles and adhere to the prudential principle stipulated by relevant regulations. This prudential principle aims to prevent or minimize risks and ensure the long-term viability of BMT's operations. One of the strategies employed to preempt and manage risks involves implementing credit risk management and prudential principles. Applying these prudential principles entails a comprehensive analysis and assessment of customers or prospective customers involved in credit transactions. Factors that BMT should consider encompass the character, collateral, capacity, capital, and sustainability of the potential customers' businesses, as elucidated by Burhanudin (2019).

Risk management and prudential principles also serve as a proactive approach to address potential financing difficulties because BMT operates as a financial intermediary, necessitating proficient fund management (Melinda & Segaf, 2023). Mistakes in managing funding sources and allocating funds could decrease the community's faith and reliance on BMT. Meanwhile, reducing the risk of financing challenges can be pursued through various strategies, including rescheduling, reconditioning, restructuring, amalgamation, collateral seizure, negotiation, debt forgiveness, and various other methods (Wibowo, 2015).

Prior research on non-performing financing within BMT has been undertaken by numerous scholars, both internationally and in Indonesia. However, these studies have primarily concentrated on the financial aspect, risk management, strategic management, and utilization of quantitative methods, thus highlighting a notable gap in the diversity of research within the Islamic finance domain. Interestingly, from an accounting perspective, the state of non-performing financing holds significant intrigue and has the potential to enrich the realm of accounting science, particularly in the context of behavioral accounting research. This research addresses several key questions to bridge this gap, employing a quantitative analysis approach. These include inquiries into how BMT manages the risk associated with non-performing financing and what measures and protocols are implemented by BMT's management for reporting customers who have fallen behind on their payments. Naturally, this research is also guided by the principles of Islamic accounting as delineated by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and PSAK Syariah (Sharia et al.) published by the Indonesian Accountants Association (IAI).

From a financial perspective, risk management is needed to anticipate risks, especially in financial institutions. Non-performing financing is one of the financial risks that may occur in the operations of Islamic financial institutions or, in this research, BMT. Many previous studies have studied in more depth regarding BMT financial risk management, as has been done by (Wibowo, 2015) and (Melinda & Segaf, 2023), or even for microfinance in other countries such as (Katterbauer & Moschetta, 2022) in Central Africa, (Mahmud et al., 2021) in Bangladesh and (Mohamed & Elgammal, 2023) with a wider scope in the world.

Looking at the condition of non-performance financing at BMT, many parties must be involved in preventing, controlling, resolving and reporting this condition to management. Of course, this falls into behavioral accounting research, where accountants and accountants report non-performance financing for each BMT customer, as defined in the seminal by (Hofstedt & Kinard, 1970). Behavioral accounting research examines the behavior of individuals, whether they are accountants or not, and how this behavior is influenced by accounting and reporting functions. This type of research, often referred to as BAR and Capital Market Research and Agency Theory Research falls under the "positive" research category. Conversely, BAR draws heavily from other scientific disciplines such as psychology, sociology, and organizational theory.

This research is a specialized field dedicated to comprehending the actions and decisions of individuals or groups within the context of accounting and financial reporting. The primary objective of this research is to uncover how various psychological, social, and economic factors can shape the decision-making process in accounting. Researchers in this field employ diverse methodologies, often employing a blended approach that integrates accounting theories with principles from the behavioral and social sciences (Okon et al., 2016).

Behavioral research in accounting involves using various models and theories to understand individual or group behavior in an accounting context. The agency theory is one of several theories generally used in behavioral research in accounting. Agency theory, also known as the principal-agent model, is a widely used framework in organizational economics and management to structure and manage contract relationships and explain the behaviors of principals and agents. It relates to the contractual arrangement between the principal and the agent to serve the principal's interests, including delegating decision-making authority (Azizah & Aswar, 2022).

The theory of the firm, managerial behavior, agency costs, and ownership structure are central to understanding agency theory (Jensen & Meckling, 2009). Additionally, behavioral agency theory focuses on bounded rationality and the principal-agent problem (Pepper et al., 2013). Furthermore, agency cost theory is an important branch of capital structural theory. The relevance of agency theory is evident in corporate governance, as demonstrated by the necessity of board accountability in agency and stewardship theory. Moreover, the behavioral agency model provides insights into managerial risk-taking behavior (Hoskisson et al., 2017).

The literature also highlights the limitations of agency theory, particularly in addressing accountability gaps in human services contracting. It is noted that the wide acceptance of the principal-agent theory perspective has hindered the development of alternative theories and methods to address important accountability gaps (Moloi et al., 2020). This suggests the need for a more comprehensive approach to understanding and addressing agency issues in various contexts.

Agency theory is fundamental in understanding the dynamics of contract relationships, managerial behavior, and corporate governance. While it provides valuable insights into the principal-agent relationship and decision-making authority, some limitations must be addressed to ensure accountability and effective governance. From a Sharia perspective, Islamic agency theory holds the potential to serve as a theoretical foundation to build a multi-dimensional conceptual framework based on independence utility. Islamic values are the basic principles for understanding manager behavior, implementation of governance and principal and agent relationships (Khalid & Sarea, 2021).

Accurately reporting non-performing financings (NPFs) in financial statements is crucial for financial transparency and risk assessment for Islamic banks and financial institutions. It provides stakeholders with essential information about the quality of a bank's financing portfolio and its potential impact on financial stability. Several studies offer insights into the reporting and management of NPFs, shedding light on the factors influencing their treatment in financial statements.

From the conventional bank perspective, reporting Non-Performing loans (NPLs ) involves considerations related to accounting standards, financial stability, and the impact of NPLs on profitability. Accruals are highlighted to reflect non-cash economic transactions in financial reports, providing a more timely and accurate representation of enterprise performance. Additionally, the relationship between NPLs and financial stability is emphasized, with studies demonstrating the significance of NPL ratios in assessing the stability of banks ((Alshebmi et al., 2020); (Thornton & Tommaso, 2021))

Furthermore, the impact of NPL reporting on profitability and capital management is a subject of interest, with research exploring the implications of financing loss provisions (LLPs) on bank profitability and signaling) (Lalon & Morshada, 2020). The nexus between unclassified financings, classified financings, and profitability is also examined, providing insights into the interplay between financing classification and financial performance (Do et al., 2020).

The regulatory and accounting treatments of NPLs are highlighted as crucial considerations, with the absence of a common definition of NPLs posing challenges in standardizing their reporting (Suss et al., 2021). Moreover, the role of auditor attestation and transparency in financial reporting is explored, emphasizing the influence of these factors on commercial lenders' financing judgments and the potential biases in resolving financing problems (Hazaea et al., 2020)

Reporting non-performing loans in financial statements involves multifaceted considerations, including accounting standards, financial stability, profitability, and regulatory treatments. The accurate and transparent reporting of NPLs is essential for stakeholders to assess the risk exposure and financial health of banks and financial institutions. From a Sharia perspective, NPL, or the term used in Islamic banking, is NPF, which has the same interests in reporting financial statements. The accounting standard that applies in Indonesia is PSAK, and the special considerations used are Sharia governance, Sharia compliance, and Islamic values in the management of financial institutions such as BMT.

Every research involves its types and approaches, depending on the researcher's preference for the type and strategy. In this study, the researcher opted for field research. This study uses qualitative content analysis, a systematic method to analyze qualitative data. It involves opportunities to analyze manifest and descriptive content, resulting in categories and latent and interpretative content, resulting in themes (Forman & Damschroder, 2007). This method is suitable for various data sources, such as interviews, observational protocols, articles subjected to literature reviews, diaries, websites, and medical records. Qualitative content analysis aims to make sense of both the words used and the person who said them, revealing depth and meaning in participants' utterances (Lindgren et al., 2020).

The study was conducted in BMT Fulan in Depok and BMT Fulanah in Bogor. However, these two BMTs opted to keep their full identities confidential. The research timeframe was evaluated in December 2023. In addition to determining the research setting, the research also necessitates identifying research subjects and encompassing data sources. These data sources were accessed through interviews. The subjects of this research comprise the Manager of BMT Fulan Depok, the Manager of BMT Fulanah Bogor, the Admin Team of BMT Fulan Depok, the Admin Team of BMT Fulanah Bogor, the Customers of BMT Fulan Depok, and the Customers of BMT Fulanah Bogor.

Research data sources are categorized into primary and secondary; primary data focuses on the information taken from the primary source (firsthand) through a survey, interview, or observation (Sekaran & Bougie, 2014). For this study, qualitative utilized qualitative data derived from primary sources. These primary sources involved informants who directly provided data to the researcher, with the informants being associated with BMT Fulan and BMT Fulanah.

It is essential to employ various methods to gather data for the research, as each researcher may have distinct approaches. Data collection techniques are the means or methods used to extract information from data sources, playing a crucial role in the research process. The primary goal of data collection is to obtain the specific data the researcher requires. Several data collection techniques are available, such as interviews, documentation, observation, etc.

In this study, the researchers utilized the following data collection techniques:

Inspection techniques are needed to determine the validity (trustworthiness) of data. The implementation of inspection techniques is based on certain criteria. According to Lexy, There are four criteria used, namely the degree of trust, transferability, dependability and confirmability (Rose & Johnson, 2020)

To test the validity of the data, this study used data triangulation techniques, which involve combining data from various existing sources. Triangulation is a data collection method that allows researchers to test data validity by combining information from different sources. If a study applies triangulation in data collection, this can mean that the researcher is simultaneously testing the credibility of the data (Natow, 2020). By combining information from various sources, the validity of the data is considered more credible, and the results become more convincing.

This study aims to dig deeper into what BMT management has prepared to mitigate financial risks, such as the risk of customer default. After conducting in-depth interviews with BMT management, several important things are highlighted as findings in this research. Figure 1 shows several keywords mentioned by informants in anticipating high NPLs in BMT operations.

In its operations, BMT Fulan Fulanah designs contracts or murabahah contracts for its customers. The selection of this contract is so that both parties can determine the margin at the start so that BMT can calculate the estimated profits and risks faced. The average contract period is only 12 months, one year, with reasonable margin estimates. Before the contract begins, the initial procedure is to evaluate potential customers using the 5C principles. In the table below is a form of the 5C principle, which is BMT's reference for determining its customers

In the financing process for customers, the 5 C's are not the only approach taken by BMT Fulan Fulanah, but they also provide understanding and awareness that the financing contract is a debt contract, so BMT also reminds the Islamic principles that exist in debt and receivable contracts as written in Al Quran surah Al Baqarah verses 282-283 which states that debts must be acknowledged and must also be repaid except in certain emergency conditions. With a process like this, it is hoped that there will be no more asymmetric information between customers and BMT management. This aligns with the concept of knowing your customer (KYC), which is more implementable from both a financial and a religious perspective.

In dealing with customers who do not perform and cannot pay their installments, BMT will enforce the SOP by the contract agreed upon at the beginning of the Murabahah contract. As far as possible, customers must settle their debts, even in several stages. Based on the experience of many customers who still have good intentions to pay off their debts, in some cases, some customers have settled their debts for up to 3 years. However, some are affected by unforeseen disasters, for example, a customer who paid for a motorbike in installments for business but lost the motorbike, so the solution was only to return the principal without a margin.

So far, the NPF at BMT Fulan Fulanah is still considered safe because it is still in the 5% range, although this must still be minimized with certain approaches to customers. BMT is trying to open more intense communication with customers to detect defaults earlier.

The reporting process for each individual with a payment failure problem is carried out periodically for internal management, and this reporting aims to make strategic decisions so that customers can continue to complete their payments.

Procedurally, there are four (4) things to do if financing problems occur, namely:

However, in practice, BMT often only rescheduling and reconditioning to resolve non-performing financing. If the conditions make it difficult to repay the debt, the customer will be released. Moreover, by recording the receivables, they will be written off.

In this NPF reporting process. There is no standard reporting standard because it is usually reported descriptively. However, in accounting principles, the process of identifying, measuring, classifying and reporting provisions for bad debts is still taken into account so as not to affect the profit calculation for BMT itself. This allowance for receivables has been regulated in the SAK and PSAK sharia murabahah. The principles of transparency and accountability play an important role in this reporting. Further, ore, this report will greatly influence management decisions regarding BMT's finances.

BMT's strategy in dealing with NPF from customers is by sharia governance. The initial stages of prevention, the process until the solution is offered, are complete. Review of Sharia financial governance and accounting practices must be accountable to stakeholders. Stakeholders' interests must be pursued, but the Islamic values applied must still be the main thing. This aligns with (Ma’ruf et al., 2023) and (Ginanjar & Kassim, 2019) research.

It must be emphasized that BMT is not just a commercial institution but also has a baitul mal or social function. So the social role of BMT should not be overlooked, namely that if customers fail to pay, it is recommended that they be diverted into Baitul Mal guidance, such as receiving special assistance for customer experiencing poverty or gharimin. Each BMT has its uniqueness, so BMT management is also required to work with customers so that they can manage their financial performance sustainably.

This study explores how BMT manages the risks associated with non-performing financing. Based on the findings from this study, each BMT has a special Standard Operational Procedures (SOP) for dealing with customers with NPF cases, a comprehensive internal and external approach, Islamic values, and a Sharia compliance approach. Reporting for NPF is carried out internationally descriptively so that management can study and make the right decisions. Meanwhile, the protocol carried out by BMT is rescheduling, reconditioning, restructuring, and confiscating collateral. This also remains based on the principles of sharia and Islamic values. Of course, this is expected to protect BMT from losses and continue to provide barakah for all BMT stakeholders.