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Determinants of Profitability in Banking Industry: A Case Study of Indonesia

Author

Listed:
  • Sapto Jumono
  • Sugiyanto
  • Chajar Matari Fath Mala

Abstract

The purpose of this study is to investigate the determinants of profitability in Indonesian banking industry. This research defines profitability as basic earning power (BEP) and return on equity (ROE) with variables like basic condition, market structure, banking characteristics and performance as its determinants. Both credit market and deposit market channel of Indonesian banking were used to analyze the data. The Structure-Conduct Performance (SCP) paradigm was used to offer theoretical perspective. Data was collected through purposive sampling technique, randomly picked from Indonesian banks financial statements during 2001-2014. The dynamic panel GMM-Arellanno Bond was used as the tool analysis. The results show that basic condition, market structure, banking characteristic, and performance significantly influence profitability. Based on this result, the study recommends that Indonesian banking segment should improve its market structure through enhancement of performance particularly that of individual banks. It also recommends that regulations and policy planning of national banking industry should be directed to retaining and increasing profitability without relying on market power, nor requiring collusion or high interest to get higher profit. The implication of the current research will be seen in judging the durability of bank profitability and finding means to make it strong enough despite the influence of crisis, money market and inflation, although it may be still sensitive to exchange rate volatility.

Suggested Citation

  • Sapto Jumono & Sugiyanto & Chajar Matari Fath Mala, 2019. "Determinants of Profitability in Banking Industry: A Case Study of Indonesia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(1), pages 91-108.
  • Handle: RePEc:asi:aeafrj:v:9:y:2019:i:1:p:91-108:id:1789
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    Cited by:

    1. Shawuya Jigeer & Ekaterina Koroleva, 2023. "The Determinants of Profitability in the City Commercial Banks: Case of China," Risks, MDPI, vol. 11(3), pages 1-21, March.
    2. Ekaterina Koroleva & Shawuya Jigeer & Anqi Miao & Angi Skhvediani, 2021. "Determinants Affecting Profitability of State-Owned Commercial Banks: Case Study of China," Risks, MDPI, vol. 9(8), pages 1-19, August.

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