The Effect of Banking Risk on Indonesia’s Regional Development Banks

Karamoy, Herman and Tulung, Joy Elly (2019): The Effect of Banking Risk on Indonesia’s Regional Development Banks. Published in: Banks and Bank System , Vol. 15, No. 2 (June 2020): pp. 130-137.

Abstract

Bank’s financial performance is the representation of its financial condition in particular period of time, either in relation to the fund raising or to the fund allocation, which is usually observed through several indicators, such as capital sufficiency, liquidity, and bank profitability. In the banking industries, profitability is the most accurate indicator to measure the bank performance. Instruments used to measure profitability are Return on Equity (ROE) and Return on Assets (ROA). In this study the effect of Banking Risk is analyze d by using the ratio of Non-Performing Loan (NPL), Net Interest Margin (NIM), Loan to Deposit Ratio (LDR), the ratio of Operational Cost to Operational Income (OCOI/BOPO) to financial performance in Regional Development Banks in Indonesia. The data used in this study were obtained from the Annual Report disseminated in the website of each banks. The number of samples is 26 Regional Development Banks in Indonesia with the period of 2013-2015. The result of this research shows that simultaneously NPL, NIM, LDR, and OBOI/BOPO are significant to ROA; while partially the NPL is significant and negatively affects ROA, NIM is significant and positively influences ROA, LDR is not significant and negatively affects ROA, and OCOI/BOPO is significant and negatively influences ROA. That means the banks have to minimize the ratio of NPL, LDR, and BOPO, for they have a negative influence on ROA. Conversely, banks have to maximize the ratio of NIM because the latter has a positive influence on ROA.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial performance, financial system, Indonesian banking, risk management in banking
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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