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

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  • Karamoy, Herman
  • Tulung, Joy Elly

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.

Suggested Citation

  • Karamoy, Herman & Tulung, Joy Elly, 2019. "The Effect of Banking Risk on Indonesia’s Regional Development Banks," MPRA Paper 113948, University Library of Munich, Germany, revised 02 Jun 2020.
    • Handle: RePEc:pra:mprapa:113948
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    File URL: https://mpra.ub.uni-muenchen.de/113948/1/MPRA_paper_113948.pdf
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    References listed on IDEAS

    as
    1. Kalish, Lionel, III & Gilbert, R Alton, 1973. "The Influence of Bank Regulation of the Operating Efficiency of Commercial Banks," Journal of Finance, American Finance Association, vol. 28(5), pages 1287-1301, December.
    2. Tulung, Joy Elly & Ramdani, Dendi, 2017. "Independence, Size and Performance of the Board an emerging market research," MPRA Paper 112180, University Library of Munich, Germany, revised 12 Jan 2018.
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    Cited by:

    1. Sondakh, Jullie J. & Tulung, Joy E. & Karamoy, Herman, 2021. "The Effect of Third-Party Funds, Credit Risk, Market Risk, and Operational Risk on Profitability in Banking for Period 2014-2017," MPRA Paper 112066, University Library of Munich, Germany, revised 16 Apr 2021.

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    More about this item

    Keywords

    financial performance; financial system; Indonesian banking; risk management in banking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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