Students name : Scoots Bar
Course number and Name : IEE 454 - Risk Management
Instructors Name : Brittany Holloman
THE EFFECT OF RISK MANAGEMENT IMPLEMENTATION ON
THE FINANCIAL PERFORMANCE OF THE BANKING INDUSTRY
1.0 Introduction:
For almost two decades, the world's financial markets have experienced turbulence
through the subprime and sovereign debt crises that occurred in the United States and Europe
which ultimately forced regulators to react. One of the responses to the financial crisis was a
re-evaluation of how to control and measure financial risk. Many financial institutions and
regulators were unprepared for the crisis, especially in relation to liquidity issues and the
integration of global financial markets (Batten & Wagner, 2014). The crisis indirectly
exposed the weaknesses of the global banking system and was not limited to one sector of the
economy. As a result, both government and investor confidence in the banking system was
shaken and is still being improved. One of them is the issuance of Basel III by the Basel
Committee on Banking Supervision (BCBS), which is a series of measurement tools to ensure
financial institutions comply with regulations in their operational activities to fulfill their role
in the economic system (Polyzos, 2015).
Sustainability and development are closely linked to a sound and healthy banking
sector. Because of this, the banking system has always been an important issue not only for
local governments but also international organizations and regulators. A dynamic
environment will lead to new developments in the market, and will require new regulations
(Kale, Eken, & Selimler, 2015). The weaknesses of the global financial system can be
addressed by using banking union as a key tool to improve and streamline crisis management.
(Carbo-Valverde, Benink, Berglund, & Wihlborg, 2015). The Financial Services Authority of
the Republic of Indonesia states that the external and internal banking environment is
experiencing rapid development which will be followed by increasingly complex risks for
banking business activities. This requires good governance practices and the functions of
identifying, measuring, monitoring, and controlling bank risk (OJK, 2016).
A bank is a company that performs an intermediation function on funds received from
customers (Bank Indonesia, n.d.). Indonesia's financial system is dominated by banks, which
held 79% of financial sector assets in 2013, compared to 50% in Malaysia. Insurance
companies held 10% of financial sector assets and less than 3% were held by pension funds.
OECD (2015) suggests that Indonesia needs to accelerate the deepening and broadening of its
financial system by increasing formal domestic savings (which reflects a low-inflation
economy) and facilitating the mobilization of funds from non-bank institutions to finance
investment, particularly in infrastructure.
In 2016, Indonesia's financial sector remained in good shape and was one of the most
favorable globally. The non-performing loan (NPL) ratio reached 3.2% in July 2016, which
was mostly in banks that hold the majority of the corporate lending portfolio. In the period
ahead, the financial sector will face challenges such as below-average economic growth, low
commodity prices, pressure from the government, and a lack of transparency to lower lending
rates, and the depreciation of the rupiah, thus weighing on asset quality and business
profitability. However, good capital adequacy and adequate liquidity will protect against the
risk of deterioration, and lower interest rates may provide additional protection (OECD,
2016).
If a bank fails, the impact will extend to customers and institutions that deposit their
funds or invest their capital in the bank, and will create a chain effect both domestically and
internationally. The important role of banks emphasizes that in carrying out their functions,
banks need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an
unstable financial system, especially if it results in a crisis, requires very high costs to
overcome. This was experienced by Indonesia during the 1998 financial crisis where it took a
lot of time and money to revive public confidence in the financial system. Based on the
background description of the problem above, researchers want to analyze the importance of
implementing and measuring risk management in the banking industry and its effect on the
company's financial performance.
This study aims to determine whether the measurement of elements in risk
management has a significant effect on the profitability of the banking industry in Indonesia
for the period 2013-2015 which can be used in measuring a risk management on the
condition of the financial performance of banking companies.
2.0 Literature Review:
2.1 Agency Theory:
The basic assumption of agency theory is that individuals will maximize their future interests
and have the resources and innovation to do so. The issue raised by agency theory is how a
manager or shareholder can benefit from a corporate action (Schroeder, Clark, & Cathey,
2014). The emphasis in the theory is that the interests of managers and shareholders are often
not the same. Agency here is defined as a consensual relationship between two parties where
one party agrees to act on behalf of the other party.
In agency theory, there is a built-in assumption that there will be a conflict of interest
between the owner (principal) and the manager (agent) due to the existence of incompatible
interests between the 2 (two) parties. This agency relationship creates costs for the owner
which include: (1) supervision of the organization; (2) binding of managers; and (3)
monitoring of the organization (3) residual loss. The expenditure on supervisory activities is
intended to enable the principal to control the behavior of the agents. Tying-up costs are
defined as expenditures to ensure that agents will not make decisions that could harm
shareholders. Finally, even though the principal has incurred the above two types of costs, the
agent can still take actions that can reduce shareholder value where this loss is referred to as
residual loss (Schroeder, Clark, & Cathey, 2014).
2.2 Risk :
According to Vaughan in Sugianto (2014), defines risk into three definitions, namely:
(1) risk is the chance of loss; (2) risk is the possibility of loss; and (3) risk is uncertainty. The
risk categories themselves in banking are (Njogo, 2012): (1) Credit risk, which is the risk of
default by a debtor on a loan or credit (principal or interest or both): (1) Liquidity risk, which
is the risk of a bank's ability to fund increases in assets and meet liabilities as they come due
without incurring unacceptable losses; (2) Interest rate risk, which is the risk (variability in
value) posed by interest bearing assets, such as loans or bonds, due to variability in interest
rates; (3) Market risk, which is the risk that exists in the market which is usually seen using
the Value at Risk (VaR) tool; (4) Operational risk, which is the potential for financial loss as a
result of disruptions in the daily operational process, one of which is unexpected earnings; (5)
Legal risk, which is the risk arising from the potential that occurs due to an adverse lawsuit in
terms of valuation that can disrupt or affect the operations or conditions of the banking
organization; (7) Reputational risk, which is the risk that arises due to the bank's reputation
that may destroy the value of the company as reflected in the shares held by shareholders.
Commercial banks are in a risky business that has received extensive attention from
many quarters. Risk in the context of banking arises from any transaction or business
decision that contains risk uncertainty of the outcome. Basically, the types of risks in banks
include credit risk, market risk, operational risk, liquidity risk, interest rate risk, foreign
exchange risk, solvency risk, and off-balance sheet risk and a holistic approach to these risks
can create value for shareholders. Risk management is more important in the financial sector
than in any other sector of the economy (Falkner & Hiebl, 2015). Controlling the unique risks
of banking can also be found in the IFSB (Islamic Financial Services Board) Guiding
Principle of Risk Management (Rahman, 2015).
2.3 Risk Management:
Firmansyah (2010) said that risk management is a process of anticipating risks so that
losses do not occur to the organization. Bank Indonesia in Bank Indonesia Regulation No.
11/25/PBI/2009 regarding the amendment to Bank Indonesia Regulation No. 5/8/PBI/2003
concerning the Implementation of Risk Management, risk is the potential loss due to the
occurrence of certain events and risk management is a series of methodologies and
procedures used to identify, measure, monitor, and control risks arising from all bank business
activities (Bank Indonesia, 2009). Risk management is also defined as a rational attempt to
reduce or avoid loss or injury (William, Smith, & Young, 1998). Meanwhile, the Institute of
Risk Management defines risk management as a process in which an organization
methodically directs the risks of its activities with the aim of achieving profitability persist in
all portfolios of organizational activities (Collier, Agyei, & Ampomah, 2006).
The objective of risk management is risk management that includes procedures and
methodologies used so that the bank's business activities can still be controlled at an
acceptable limit and benefit the Bank. The implementation of risk management is expected to
provide benefits, both to banks and bank supervisory authorities. For banks, the
implementation of risk management can: (1) increase shareholder value; (2) provide an
overview to bank managers regarding the possibility of bank losses in the future; (3) improve
systematic methods and processes based on the availability of information; (4) used as a basis
for more accurate measurement of bank performance; (5) to assess the risks inherent in
relatively complex instruments or business activities of the bank; and (6) create a solid
infrastructure in order to improve the competitiveness of the Bank (Tampubolon, 2004).
According to Falkner & Hiebl (2015) and Rahman (2015), the risk management
process consists of: (1) risk identification; (2) risk analysis; (3) technique selection; (4)
strategy selection; (5) control. Identification of potential risks must be done continuously and
systematically using various methods or tools such as checklists and financial reports.
Strategic risks should be avoided, and operational risks should be identified and controlled.
With limited resources, risk analysis can be carried out only on risks that have major
consequences with the result of selecting appropriate techniques in dealing with them. All
members of the organization should be informed of the company's risk management
objectives. Then, the organization must determine the standards or performance criteria for
the risk management objectives.
2.4 Bank Financial Performance:
Orazalin, Mahmood, & Lee (2016) in their research on banks listed on the Russian
Stock Exchange (RST) stated that corporate governance has an influence on bank
performance before and after the financial crisis where there is an increase in corporate
governance practices. Lessen, Dentchev, & Roger (2014) further stated that financial
institutions have a systemic impact on the economy and their function in society. This is a
major challenge for business continuity and corporate governance. In this study, it was found
that corporate responsibility and governance have a limited contribution to business
continuity in a sustainable economy.
Battaglia, Fiordelisi, & Ricci's (2016) research is related to the adoption of Enterprise
Risk Management (ERM) in relation to bank risk reduction and bank profitability. By
analyzing banks in Europe during 2005 Through 2013, it was found that after the
implementation of ERM, banks experienced an increase in risk-adjusted profits and an
overall reduction in risk. The way to measure the effectiveness of a bank's risk management
is by measuring the bank's profitability. According to Kuswadi (2005) bank profitability can
be measured through profitability ratios which include net profit margin (NPM), gross profit
margin, Return on investment (ROI), return on Asset (ROA) and return on equity (ROE). At
the micro level, profitability is important in a competitive bank industry. It is not only an
outcome but also a necessity for a successful business in a period of growing competition in
the financial markets. The basic objective of banking management is of course to generate
profits on which the existence, growth, and sustainability of an organization depends
(Menicucci & Paolucci, 2016).
Robertson (2002) in Mahmudi (2007) explains that performance measurement is a
process of assessing work progress towards achieving predetermined goals and objectives.
Jones (2004) states that organizations must constantly change to develop their effectiveness,
these changes are shown to find or develop ways to use existing resources and capabilities to
increase the ability to create value and improve performance. The annual report is one source
of information to get a picture of the company's financial performance. This information
provided by the company's management is one way to provide an overview of the company's
financial performance company performance to stakeholders. According to Harahap (2004),
suggests that "Profitability or also called profitability describes The company's ability to earn
profits through all existing capabilities and sources such as sales activities, cash, capital,
number of employees, number of branches, and so on ". Meanwhile, according to Astuti
(2004) defines "Profitability as the ability of a company to generate profits". One of the most
important measures of profitability is net income. Investors and creditors are very interested
in evaluating the company's ability to generate current profits and own capital.
Banks in Indonesia have higher margins on savings rates and lending rates when
compared to banks in other ASEAN countries. This reflects the need for banks to cover
higher operating costs (between 2.5% and 4% of bank assets, compared to 2% in Malaysia,
and 1% in Singapore). Due to the geography and inefficiency of the Indonesian banking
industry, some of the operating cost to total asset ratios of Indonesian banks are the highest
among banks in the G20. However, Indonesian banks are also the most profitable banks in
the G20 due to net interest margins, averaging 7 percentage points. The average interest rate
on loans is 12%, while the average interest rate paid to depositors is 5% (OECD, 2015).
2.5 Previous Research:
Clarity of direction, originality and usefulness of a research conducted by researchers
will be seen. The researcher is able to trace in depth some of the research conducted now. In
connection with this, this section will discuss some of the findings of previous research.
3.0 Research Methods:
This study uses quantitative methods by using elements in financial statements as
research variables. The population in this study uses secondary data obtained from the annual
reports of companies focused on the banking sector from 2013 to 2015 listed on the Indonesia
Stock Exchange. This secondary data was obtained from the Indonesia Stock Exchange
Website, namely www.idx.co.id.
The sample selection method used in this study is purposive sampling method which
is a method of determining respondents to be sampled based on certain criteria. The sample
selection criteria in this study are (a) The number of companies in the banking sector listed in
2013 to 2015; (b) Companies that publish complete annual reports from 2013 to 2015.
In this study the authors used the influence analysis method, namely linear regression.
Is one of the tools that can be used in predicting future demand based on past data, or to
determine the effect of one independent variable (independent) on one independent variable
(dependent). The software used to help process data in this study includes SPSS (Statistical
Package for Service Solution) for windows version, which is software that functions to
analyze data, perform statistical calculations, both for parametric and non-parametric
statistics on a windows basis (Ghozali, 2013).
3.1 Net Interest Margin and Return on Equity:
Net interest margin which is the ratio between interest generated on loans and interest
paid to borrowers in this study has a significant effect on return on equity. This is in line with
the research of Menicucci & Paolucci (2016) which states that interest net margin (NIM) has
a significant positive effect on profitability. This result is also consistent with the concerns of
banks in Europe related to the intermediary role between lenders and borrowers, where
deposits are transformed into loans. In this case, a high level of lending results in a high level
of profit as well.
Doyran's (2013) research on net interest margins and bank performance in developing
countries states that factors such as management expenses (operating cost
efficiency/inefficiency), leverage, and liquidity are important factors related to NIM and ROA
in the banking industry in Argentina. High high levels of profitability are associated with
banks that have less debt and therefore exhibit a lower debt to total assets ratio. Finally, high
NIM levels can also be associated with high operating expenses.
3.2 Net Performing Loan and Return on Equity:
Loan performance in microfinance institutions can be linked to financial management
practices, especially to the institution's competitive advantage. In Nkundabanyanga's
research, Akankunda, Nalukenge, & Tusiime (2017) found that there is a positive relationship
between competitive advantage and loan performance. Mclver (2005) identified several real
and financial options that could help transfer non-performing loans from state-owned
commercial banks to asset management companies. This ensures that non-performing assets
remain under the control of commercial banks. The results of Menicucci & Paolucci (2016)
state that not all determinant variables have a significant effect on the profitability of a bank.
The results showed that there is uncertainty and diversity between the loan ratio (LOAN) and
the measurement of profitability used where the relationship is positive and insignificant.
This indicates that with the increase in the value of loans issued, the higher the level of
profitability.
However, since the results of the study were not significant, the relationship between
these two variables cannot be stated with certainty.
3.3 Capital Adequacy Ratio and Return on Equity:
Menicucci & Paolucci (2016) stated that the amount of deposits to total assets has no
significant effect on profitability when measured by NIM. However, Capital Adequacy Ratio
(CAR) has a positive significant effect when it comes to profitability. This means that well-
capitalized banks will experience higher returns with reduced funding costs and face a lower
risk of insolvency. Conversely, a lower capital ratio in banking implies greater debt and risk,
and higher borrowing costs. This is in accordance with the results of the author's research
which states that the Capital Adequacy Ratio has a significant effect on profitability.
3.4 Loan Deposit Ratio and Return on Equity:
Liquidity risk affects not only a bank's performance but also its reputation. A bank
may lose the trust of its customers if funds are not available when they are needed. In
addition, low liquidity levels may lead to penalties by the financial authorities. For this
reason, it is important for banks to maintain their liquidity levels (Arif & Anees, 2012). A
liquidity crisis can develop into an overall capital crisis in a relatively short period of time.
Banks can avoid this crisis by focusing on liquidity ratios so that it has no incidental effect on
the company's financial position (Goddard, Molyneux, & Wilson, 2009).
Based on the above discussion, it can be interpreted that banks must maintain liquidity
levels due to two main factors: (1) customer confidence, and (2) regulatory compliance.
Liquidity levels that are not as expected can lead to penalties for compliance violations and
ultimately can cause customers to lose trust. Therefore, the liquidity level of a bank does not
have a significant influence on profitability due to the need to maintain liquidity regardless of
the level of profitability.
3.5 Research Model and Interpretation:
The important role of banks emphasizes that in carrying out their functions, banks
need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an unstable
financial system, especially if it results in a crisis, requires very high costs to overcome. The
stricter the regulations applied, the greater the level of stability in a system while still
considering the level of liquidity and distress of the Bank (Polyzos, 2015).
The banking system and its stability must be maintained with measures that do not
specifically target financial institutions. These institutions do not operate in isolation from the
rest of the economy but have a distinct role to play in maintaining economic stability and
prosperity. Regulators should support this dual role without losing sight of the fact that
Shareholders often only focus on profitability (Polyzos, 2015). This is also corroborated by
Kale, Eken, & Selimler's (2015) research indicating that strict regulation, frequent
monitoring, more restrictions, strengthened supervision, and more capital and reforms have a
positive effect on efficiency. Although deregulation and limited supervision sometimes lead
to efficiency gains, the results tend to be unsustainable due to an unstable macroeconomic
environment and/or poor management practices resulting from unspecified supervision
conditions.
It is also worth noting that too much regulatory burden can make the regulations
issued bind too tightly which ultimately increases the possibility of organizational bankruptcy
in the event of a crisis threat (Aldasoro, Gatti, & Faia, 2016). Internal factors are more
effectively related to the productivity level of a bank than internal factors, indicating that the
quality of management plays a more important role than regulations and monitoring by
regulators (Kale, Eken, & Selimler, 2015).
4.0 Conclusions and Suggestions
In understanding the role of risk management in the survival of the banking industry,
this study tries to measure the risks that occur in companies such as interest rate risk, credit
risk, solvency & capital risk, and liquidity, each of which is proxied by the ratio of NIM,
NPL, CAR, and LDR.
The bank's financial performance is measured by the profitability ratio, namely ROE.
From the research results, it shows the application of Risk management simultaneously has a
significant and positive effect on the company's financial performance. And when explained
in more detail, this study also provides results that NIM and CAR ratios have a significant
effect on ROE, while NPL and LDR have not provided sufficient influence on ROE.
Therefore, in order to increase ROE, both banks that have gone public and banks that
have not gone public must be able to continue to maintain and increase the value of NIM and
CAR. This can be done through optimizing bank performance through bank interest income
or increasing fee-based income, which can increase bank ROE. Then in providing credit, go
public banks must always be selective and careful in choosing loan debtors so that the loans
that have been channeled can avoid bad credit, one solution is to tighten the loan conditions
with 5C (Character, Capability, Capital, Collateral, and Condition of economy). Banks also
need to carry out strict supervision on loans that have been running and minimize bad debts
so that the NPL value is less than 5% and CAR regulations are more concerned.
In addition, banks must be able to manage LDR by continuing to maintain the amount
of LDR to stay within the range of 78%-110%. This can be done by maximizing savings
collection and balanced with optimal lending without ignoring the applicable rules to avoid
bad debts so that maximum credit interest income is obtained. (Ernawati, 2011) From the
results of the research conducted, it can provide advice to the banking industry in Indonesia
to always be aware of unpredictable banking risks. Running risk management appropriately
and good governance will be one way for banks to survive and even excel among the modern
business world that is always dynamic.
For the Indonesian government, it is expected to always pay attention to regulations
regarding banking so that this industry can properly carry out its function to improve the
welfare of society. Regulations relating to the establishment of a bank should also be strictly
regulated, so as to avoid the possibility of "failed banks" due to weak foundations when a
new bank is established.
For the people of Indonesia, before applying for credit or storing wealth in banks,
hopefully the results of this study can be a point of public awareness to be more sensitive
about the health of a banking industry, so as not to be trapped in a banking environment that
is not conducive and detrimental to society.
For future research, it is hoped that the sample used can be more specific, for example
using a sample of the non-government banking industry in order to clearly examine the health
and ability of a bank to face risks and their impact on the financial performance of the
banking industry.
Sustainability and development are closely linked to a sound and healthy banking
sector. Because of this, the banking system has always been an important issue not only for
local governments but also international organizations and regulators. A dynamic
environment will lead to new developments in the market, and will require new regulations
(Kale, Eken, & Selimler, 2015). The weaknesses of the global financial system can be
addressed by using banking union as a key tool to improve and streamline crisis management.
(Carbo-Valverde, Benink, Berglund, & Wihlborg, 2015). The Financial Services Authority of
the Republic of Indonesia states that the external and internal banking environment is
experiencing rapid development which will be followed by increasingly complex risks for
banking business activities. This requires good governance practices and the functions of
identifying, measuring, monitoring, and controlling bank risk (OJK, 2016).
A bank is a company that performs an intermediation function on funds received from
customers (Bank Indonesia, n.d.). Indonesia's financial system is dominated by banks, which
held 79% of financial sector assets in 2013, compared to 50% in Malaysia. Insurance
companies held 10% of financial sector assets and less than 3% were held by pension funds.
OECD (2015) suggests that Indonesia needs to accelerate the deepening and broadening of its
financial system by increasing formal domestic savings (which reflects a low-inflation
economy) and facilitating the mobilization of funds from non-bank institutions to finance
investment, particularly in infrastructure.
In 2016, Indonesia's financial sector remained in good shape and was one of the most
favorable globally. The non-performing loan (NPL) ratio reached 3.2% in July 2016, which
was mostly in banks that hold the majority of the corporate lending portfolio. In the period
ahead, the financial sector will face challenges such as below-average economic growth, low
commodity prices, pressure from the government, and a lack of transparency to lower lending
rates, and the depreciation of the rupiah, thus weighing on asset quality and business
profitability. However, good capital adequacy and adequate liquidity will protect against the
risk of deterioration, and lower interest rates may provide additional protection (OECD,
2016).
If a bank fails, the impact will extend to customers and institutions that deposit their
funds or invest their capital in the bank, and will create a chain effect both domestically and
internationally. The important role of banks emphasizes that in carrying out their functions,
banks need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an
unstable financial system, especially if it results in a crisis, requires very high costs to
overcome. This was experienced by Indonesia during the 1998 financial crisis where it took a
lot of time and money to revive public confidence in the financial system. Based on the
background description of the problem above, researchers want to analyze the importance of
implementing and measuring risk management in the banking industry and its effect on the
company's financial performance.
This study aims to determine whether the measurement of elements in risk
management has a significant effect on the profitability of the banking industry in Indonesia
for the period 2013-2015 which can be used in measuring a risk management on the
condition of the financial performance of banking companies.
2.0 Literature Review:
2.1 Agency Theory:
The basic assumption of agency theory is that individuals will maximize their future interests
and have the resources and innovation to do so. The issue raised by agency theory is how a
manager or shareholder can benefit from a corporate action (Schroeder, Clark, & Cathey,
2014). The emphasis in the theory is that the interests of managers and shareholders are often
not the same. Agency here is defined as a consensual relationship between two parties where
one party agrees to act on behalf of the other party.
In agency theory, there is a built-in assumption that there will be a conflict of interest
between the owner (principal) and the manager (agent) due to the existence of incompatible
interests between the 2 (two) parties. This agency relationship creates costs for the owner
which include: (1) supervision of the organization; (2) binding of managers; and (3)
monitoring of the organization (3) residual loss. The expenditure on supervisory activities is
intended to enable the principal to control the behavior of the agents. Tying-up costs are
defined as expenditures to ensure that agents will not make decisions that could harm
shareholders. Finally, even though the principal has incurred the above two types of costs, the
agent can still take actions that can reduce shareholder value where this loss is referred to as
residual loss (Schroeder, Clark, & Cathey, 2014).
2.2 Risk :
According to Vaughan in Sugianto (2014), defines risk into three definitions, namely:
(1) risk is the chance of loss; (2) risk is the possibility of loss; and (3) risk is uncertainty. The
risk categories themselves in banking are (Njogo, 2012): (1) Credit risk, which is the risk of
default by a debtor on a loan or credit (principal or interest or both): (1) Liquidity risk, which
is the risk of a bank's ability to fund increases in assets and meet liabilities as they come due
without incurring unacceptable losses; (2) Interest rate risk, which is the risk (variability in
value) posed by interest bearing assets, such as loans or bonds, due to variability in interest
rates; (3) Market risk, which is the risk that exists in the market which is usually seen using
the Value at Risk (VaR) tool; (4) Operational risk, which is the potential for financial loss as a
result of disruptions in the daily operational process, one of which is unexpected earnings; (5)
Legal risk, which is the risk arising from the potential that occurs due to an adverse lawsuit in
terms of valuation that can disrupt or affect the operations or conditions of the banking
organization; (7) Reputational risk, which is the risk that arises due to the bank's reputation
that may destroy the value of the company as reflected in the shares held by shareholders.
Commercial banks are in a risky business that has received extensive attention from
many quarters. Risk in the context of banking arises from any transaction or business
decision that contains risk uncertainty of the outcome. Basically, the types of risks in banks
include credit risk, market risk, operational risk, liquidity risk, interest rate risk, foreign
exchange risk, solvency risk, and off-balance sheet risk and a holistic approach to these risks
can create value for shareholders. Risk management is more important in the financial sector
than in any other sector of the economy (Falkner & Hiebl, 2015). Controlling the unique risks
of banking can also be found in the IFSB (Islamic Financial Services Board) Guiding
Principle of Risk Management (Rahman, 2015).
2.3 Risk Management:
Firmansyah (2010) said that risk management is a process of anticipating risks so that
losses do not occur to the organization. Bank Indonesia in Bank Indonesia Regulation No.
11/25/PBI/2009 regarding the amendment to Bank Indonesia Regulation No. 5/8/PBI/2003
concerning the Implementation of Risk Management, risk is the potential loss due to the
occurrence of certain events and risk management is a series of methodologies and
procedures used to identify, measure, monitor, and control risks arising from all bank business
activities (Bank Indonesia, 2009). Risk management is also defined as a rational attempt to
reduce or avoid loss or injury (William, Smith, & Young, 1998). Meanwhile, the Institute of
Risk Management defines risk management as a process in which an organization
methodically directs the risks of its activities with the aim of achieving profitability persist in
all portfolios of organizational activities (Collier, Agyei, & Ampomah, 2006).
The objective of risk management is risk management that includes procedures and
methodologies used so that the bank's business activities can still be controlled at an
acceptable limit and benefit the Bank. The implementation of risk management is expected to
provide benefits, both to banks and bank supervisory authorities. For banks, the
implementation of risk management can: (1) increase shareholder value; (2) provide an
overview to bank managers regarding the possibility of bank losses in the future; (3) improve
systematic methods and processes based on the availability of information; (4) used as a basis
for more accurate measurement of bank performance; (5) to assess the risks inherent in
relatively complex instruments or business activities of the bank; and (6) create a solid
infrastructure in order to improve the competitiveness of the Bank (Tampubolon, 2004).
According to Falkner & Hiebl (2015) and Rahman (2015), the risk management
process consists of: (1) risk identification; (2) risk analysis; (3) technique selection; (4)
strategy selection; (5) control. Identification of potential risks must be done continuously and
systematically using various methods or tools such as checklists and financial reports.
Strategic risks should be avoided, and operational risks should be identified and controlled.
With limited resources, risk analysis can be carried out only on risks that have major
consequences with the result of selecting appropriate techniques in dealing with them. All
members of the organization should be informed of the company's risk management
objectives. Then, the organization must determine the standards or performance criteria for
the risk management objectives.
2.4 Bank Financial Performance:
Orazalin, Mahmood, & Lee (2016) in their research on banks listed on the Russian
Stock Exchange (RST) stated that corporate governance has an influence on bank
performance before and after the financial crisis where there is an increase in corporate
governance practices. Lessen, Dentchev, & Roger (2014) further stated that financial
institutions have a systemic impact on the economy and their function in society. This is a
major challenge for business continuity and corporate governance. In this study, it was found
that corporate responsibility and governance have a limited contribution to business
continuity in a sustainable economy.
Battaglia, Fiordelisi, & Ricci's (2016) research is related to the adoption of Enterprise
Risk Management (ERM) in relation to bank risk reduction and bank profitability. By
analyzing banks in Europe during 2005 Through 2013, it was found that after the
implementation of ERM, banks experienced an increase in risk-adjusted profits and an
overall reduction in risk. The way to measure the effectiveness of a bank's risk management
is by measuring the bank's profitability. According to Kuswadi (2005) bank profitability can
be measured through profitability ratios which include net profit margin (NPM), gross profit
margin, Return on investment (ROI), return on Asset (ROA) and return on equity (ROE). At
the micro level, profitability is important in a competitive bank industry. It is not only an
outcome but also a necessity for a successful business in a period of growing competition in
the financial markets. The basic objective of banking management is of course to generate
profits on which the existence, growth, and sustainability of an organization depends
(Menicucci & Paolucci, 2016).
Robertson (2002) in Mahmudi (2007) explains that performance measurement is a
process of assessing work progress towards achieving predetermined goals and objectives.
Jones (2004) states that organizations must constantly change to develop their effectiveness,
these changes are shown to find or develop ways to use existing resources and capabilities to
increase the ability to create value and improve performance. The annual report is one source
of information to get a picture of the company's financial performance. This information
provided by the company's management is one way to provide an overview of the company's
financial performance company performance to stakeholders. According to Harahap (2004),
suggests that "Profitability or also called profitability describes The company's ability to earn
profits through all existing capabilities and sources such as sales activities, cash, capital,
number of employees, number of branches, and so on ". Meanwhile, according to Astuti
(2004) defines "Profitability as the ability of a company to generate profits". One of the most
important measures of profitability is net income. Investors and creditors are very interested
in evaluating the company's ability to generate current profits and own capital.
Banks in Indonesia have higher margins on savings rates and lending rates when
compared to banks in other ASEAN countries. This reflects the need for banks to cover
higher operating costs (between 2.5% and 4% of bank assets, compared to 2% in Malaysia,
and 1% in Singapore). Due to the geography and inefficiency of the Indonesian banking
industry, some of the operating cost to total asset ratios of Indonesian banks are the highest
among banks in the G20. However, Indonesian banks are also the most profitable banks in
the G20 due to net interest margins, averaging 7 percentage points. The average interest rate
on loans is 12%, while the average interest rate paid to depositors is 5% (OECD, 2015).
2.5 Previous Research:
Clarity of direction, originality and usefulness of a research conducted by researchers
will be seen. The researcher is able to trace in depth some of the research conducted now. In
connection with this, this section will discuss some of the findings of previous research.
3.0 Research Methods:
This study uses quantitative methods by using elements in financial statements as
research variables. The population in this study uses secondary data obtained from the annual
reports of companies focused on the banking sector from 2013 to 2015 listed on the Indonesia
Stock Exchange. This secondary data was obtained from the Indonesia Stock Exchange
Website, namely www.idx.co.id.
The sample selection method used in this study is purposive sampling method which
is a method of determining respondents to be sampled based on certain criteria. The sample
selection criteria in this study are (a) The number of companies in the banking sector listed in
2013 to 2015; (b) Companies that publish complete annual reports from 2013 to 2015.
In this study the authors used the influence analysis method, namely linear regression.
Is one of the tools that can be used in predicting future demand based on past data, or to
determine the effect of one independent variable (independent) on one independent variable
(dependent). The software used to help process data in this study includes SPSS (Statistical
Package for Service Solution) for windows version, which is software that functions to
analyze data, perform statistical calculations, both for parametric and non-parametric
statistics on a windows basis (Ghozali, 2013).
3.1 Net Interest Margin and Return on Equity:
Net interest margin which is the ratio between interest generated on loans and interest
paid to borrowers in this study has a significant effect on return on equity. This is in line with
the research of Menicucci & Paolucci (2016) which states that interest net margin (NIM) has
a significant positive effect on profitability. This result is also consistent with the concerns of
banks in Europe related to the intermediary role between lenders and borrowers, where
deposits are transformed into loans. In this case, a high level of lending results in a high level
of profit as well.
Doyran's (2013) research on net interest margins and bank performance in developing
countries states that factors such as management expenses (operating cost
efficiency/inefficiency), leverage, and liquidity are important factors related to NIM and ROA
in the banking industry in Argentina. High high levels of profitability are associated with
banks that have less debt and therefore exhibit a lower debt to total assets ratio. Finally, high
NIM levels can also be associated with high operating expenses.
3.2 Net Performing Loan and Return on Equity:
Loan performance in microfinance institutions can be linked to financial management
practices, especially to the institution's competitive advantage. In Nkundabanyanga's
research, Akankunda, Nalukenge, & Tusiime (2017) found that there is a positive relationship
between competitive advantage and loan performance. Mclver (2005) identified several real
and financial options that could help transfer non-performing loans from state-owned
commercial banks to asset management companies. This ensures that non-performing assets
remain under the control of commercial banks. The results of Menicucci & Paolucci (2016)
state that not all determinant variables have a significant effect on the profitability of a bank.
The results showed that there is uncertainty and diversity between the loan ratio (LOAN) and
the measurement of profitability used where the relationship is positive and insignificant.
This indicates that with the increase in the value of loans issued, the higher the level of
profitability.
However, since the results of the study were not significant, the relationship between
these two variables cannot be stated with certainty.
3.3 Capital Adequacy Ratio and Return on Equity:
Menicucci & Paolucci (2016) stated that the amount of deposits to total assets has no
significant effect on profitability when measured by NIM. However, Capital Adequacy Ratio
(CAR) has a positive significant effect when it comes to profitability. This means that well-
capitalized banks will experience higher returns with reduced funding costs and face a lower
risk of insolvency. Conversely, a lower capital ratio in banking implies greater debt and risk,
and higher borrowing costs. This is in accordance with the results of the author's research
which states that the Capital Adequacy Ratio has a significant effect on profitability.
3.4 Loan Deposit Ratio and Return on Equity:
Liquidity risk affects not only a bank's performance but also its reputation. A bank
may lose the trust of its customers if funds are not available when they are needed. In
addition, low liquidity levels may lead to penalties by the financial authorities. For this
reason, it is important for banks to maintain their liquidity levels (Arif & Anees, 2012). A
liquidity crisis can develop into an overall capital crisis in a relatively short period of time.
Banks can avoid this crisis by focusing on liquidity ratios so that it has no incidental effect on
the company's financial position (Goddard, Molyneux, & Wilson, 2009).
Based on the above discussion, it can be interpreted that banks must maintain liquidity
levels due to two main factors: (1) customer confidence, and (2) regulatory compliance.
Liquidity levels that are not as expected can lead to penalties for compliance violations and
ultimately can cause customers to lose trust. Therefore, the liquidity level of a bank does not
have a significant influence on profitability due to the need to maintain liquidity regardless of
the level of profitability.
3.5 Research Model and Interpretation:
The important role of banks emphasizes that in carrying out their functions, banks
need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an unstable
financial system, especially if it results in a crisis, requires very high costs to overcome. The
stricter the regulations applied, the greater the level of stability in a system while still
considering the level of liquidity and distress of the Bank (Polyzos, 2015).
The banking system and its stability must be maintained with measures that do not
specifically target financial institutions. These institutions do not operate in isolation from the
rest of the economy but have a distinct role to play in maintaining economic stability and
prosperity. Regulators should support this dual role without losing sight of the fact that
Shareholders often only focus on profitability (Polyzos, 2015). This is also corroborated by
Kale, Eken, & Selimler's (2015) research indicating that strict regulation, frequent
monitoring, more restrictions, strengthened supervision, and more capital and reforms have a
positive effect on efficiency. Although deregulation and limited supervision sometimes lead
to efficiency gains, the results tend to be unsustainable due to an unstable macroeconomic
environment and/or poor management practices resulting from unspecified supervision
conditions.
It is also worth noting that too much regulatory burden can make the regulations
issued bind too tightly which ultimately increases the possibility of organizational bankruptcy
in the event of a crisis threat (Aldasoro, Gatti, & Faia, 2016). Internal factors are more
effectively related to the productivity level of a bank than internal factors, indicating that the
quality of management plays a more important role than regulations and monitoring by
regulators (Kale, Eken, & Selimler, 2015).
4.0 Conclusions and Suggestions
In understanding the role of risk management in the survival of the banking industry,
this study tries to measure the risks that occur in companies such as interest rate risk, credit
risk, solvency & capital risk, and liquidity, each of which is proxied by the ratio of NIM,
NPL, CAR, and LDR.
The bank's financial performance is measured by the profitability ratio, namely ROE.
From the research results, it shows the application of Risk management simultaneously has a
significant and positive effect on the company's financial performance. And when explained
in more detail, this study also provides results that NIM and CAR ratios have a significant
effect on ROE, while NPL and LDR have not provided sufficient influence on ROE.
Therefore, in order to increase ROE, both banks that have gone public and banks that
have not gone public must be able to continue to maintain and increase the value of NIM and
CAR. This can be done through optimizing bank performance through bank interest income
or increasing fee-based income, which can increase bank ROE. Then in providing credit, go
public banks must always be selective and careful in choosing loan debtors so that the loans
that have been channeled can avoid bad credit, one solution is to tighten the loan conditions
with 5C (Character, Capability, Capital, Collateral, and Condition of economy). Banks also
need to carry out strict supervision on loans that have been running and minimize bad debts
so that the NPL value is less than 5% and CAR regulations are more concerned.
In addition, banks must be able to manage LDR by continuing to maintain the amount
of LDR to stay within the range of 78%-110%. This can be done by maximizing savings
collection and balanced with optimal lending without ignoring the applicable rules to avoid
bad debts so that maximum credit interest income is obtained. (Ernawati, 2011) From the
results of the research conducted, it can provide advice to the banking industry in Indonesia
to always be aware of unpredictable banking risks. Running risk management appropriately
and good governance will be one way for banks to survive and even excel among the modern
business world that is always dynamic.
For the Indonesian government, it is expected to always pay attention to regulations
regarding banking so that this industry can properly carry out its function to improve the
welfare of society. Regulations relating to the establishment of a bank should also be strictly
regulated, so as to avoid the possibility of "failed banks" due to weak foundations when a
new bank is established.
For the people of Indonesia, before applying for credit or storing wealth in banks,
hopefully the results of this study can be a point of public awareness to be more sensitive
about the health of a banking industry, so as not to be trapped in a banking environment that
is not conducive and detrimental to society.
For future research, it is hoped that the sample used can be more specific, for example
using a sample of the non-government banking industry in order to clearly examine the health
and ability of a bank to face risks and their impact on the financial performance of the
banking industry.
Sustainability and development are closely linked to a sound and healthy banking
sector. Because of this, the banking system has always been an important issue not only for
local governments but also international organizations and regulators. A dynamic
environment will lead to new developments in the market, and will require new regulations
(Kale, Eken, & Selimler, 2015). The weaknesses of the global financial system can be
addressed by using banking union as a key tool to improve and streamline crisis management.
(Carbo-Valverde, Benink, Berglund, & Wihlborg, 2015). The Financial Services Authority of
the Republic of Indonesia states that the external and internal banking environment is
experiencing rapid development which will be followed by increasingly complex risks for
banking business activities. This requires good governance practices and the functions of
identifying, measuring, monitoring, and controlling bank risk (OJK, 2016).
A bank is a company that performs an intermediation function on funds received from
customers (Bank Indonesia, n.d.). Indonesia's financial system is dominated by banks, which
held 79% of financial sector assets in 2013, compared to 50% in Malaysia. Insurance
companies held 10% of financial sector assets and less than 3% were held by pension funds.
OECD (2015) suggests that Indonesia needs to accelerate the deepening and broadening of its
financial system by increasing formal domestic savings (which reflects a low-inflation
economy) and facilitating the mobilization of funds from non-bank institutions to finance
investment, particularly in infrastructure.
In 2016, Indonesia's financial sector remained in good shape and was one of the most
favorable globally. The non-performing loan (NPL) ratio reached 3.2% in July 2016, which
was mostly in banks that hold the majority of the corporate lending portfolio. In the period
ahead, the financial sector will face challenges such as below-average economic growth, low
commodity prices, pressure from the government, and a lack of transparency to lower lending
rates, and the depreciation of the rupiah, thus weighing on asset quality and business
profitability. However, good capital adequacy and adequate liquidity will protect against the
risk of deterioration, and lower interest rates may provide additional protection (OECD,
2016).
If a bank fails, the impact will extend to customers and institutions that deposit their
funds or invest their capital in the bank, and will create a chain effect both domestically and
internationally. The important role of banks emphasizes that in carrying out their functions,
banks need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an
unstable financial system, especially if it results in a crisis, requires very high costs to
overcome. This was experienced by Indonesia during the 1998 financial crisis where it took a
lot of time and money to revive public confidence in the financial system. Based on the
background description of the problem above, researchers want to analyze the importance of
implementing and measuring risk management in the banking industry and its effect on the
company's financial performance.
This study aims to determine whether the measurement of elements in risk
management has a significant effect on the profitability of the banking industry in Indonesia
for the period 2013-2015 which can be used in measuring a risk management on the
condition of the financial performance of banking companies.
2.0 Literature Review:
2.1 Agency Theory:
The basic assumption of agency theory is that individuals will maximize their future interests
and have the resources and innovation to do so. The issue raised by agency theory is how a
manager or shareholder can benefit from a corporate action (Schroeder, Clark, & Cathey,
2014). The emphasis in the theory is that the interests of managers and shareholders are often
not the same. Agency here is defined as a consensual relationship between two parties where
one party agrees to act on behalf of the other party.
In agency theory, there is a built-in assumption that there will be a conflict of interest
between the owner (principal) and the manager (agent) due to the existence of incompatible
interests between the 2 (two) parties. This agency relationship creates costs for the owner
which include: (1) supervision of the organization; (2) binding of managers; and (3)
monitoring of the organization (3) residual loss. The expenditure on supervisory activities is
intended to enable the principal to control the behavior of the agents. Tying-up costs are
defined as expenditures to ensure that agents will not make decisions that could harm
shareholders. Finally, even though the principal has incurred the above two types of costs, the
agent can still take actions that can reduce shareholder value where this loss is referred to as
residual loss (Schroeder, Clark, & Cathey, 2014).
2.2 Risk :
According to Vaughan in Sugianto (2014), defines risk into three definitions, namely:
(1) risk is the chance of loss; (2) risk is the possibility of loss; and (3) risk is uncertainty. The
risk categories themselves in banking are (Njogo, 2012): (1) Credit risk, which is the risk of
default by a debtor on a loan or credit (principal or interest or both): (1) Liquidity risk, which
is the risk of a bank's ability to fund increases in assets and meet liabilities as they come due
without incurring unacceptable losses; (2) Interest rate risk, which is the risk (variability in
value) posed by interest bearing assets, such as loans or bonds, due to variability in interest
rates; (3) Market risk, which is the risk that exists in the market which is usually seen using
the Value at Risk (VaR) tool; (4) Operational risk, which is the potential for financial loss as a
result of disruptions in the daily operational process, one of which is unexpected earnings; (5)
Legal risk, which is the risk arising from the potential that occurs due to an adverse lawsuit in
terms of valuation that can disrupt or affect the operations or conditions of the banking
organization; (7) Reputational risk, which is the risk that arises due to the bank's reputation
that may destroy the value of the company as reflected in the shares held by shareholders.
Commercial banks are in a risky business that has received extensive attention from
many quarters. Risk in the context of banking arises from any transaction or business
decision that contains risk uncertainty of the outcome. Basically, the types of risks in banks
include credit risk, market risk, operational risk, liquidity risk, interest rate risk, foreign
exchange risk, solvency risk, and off-balance sheet risk and a holistic approach to these risks
can create value for shareholders. Risk management is more important in the financial sector
than in any other sector of the economy (Falkner & Hiebl, 2015). Controlling the unique risks
of banking can also be found in the IFSB (Islamic Financial Services Board) Guiding
Principle of Risk Management (Rahman, 2015).
2.3 Risk Management:
Firmansyah (2010) said that risk management is a process of anticipating risks so that
losses do not occur to the organization. Bank Indonesia in Bank Indonesia Regulation No.
11/25/PBI/2009 regarding the amendment to Bank Indonesia Regulation No. 5/8/PBI/2003
concerning the Implementation of Risk Management, risk is the potential loss due to the
occurrence of certain events and risk management is a series of methodologies and
procedures used to identify, measure, monitor, and control risks arising from all bank business
activities (Bank Indonesia, 2009). Risk management is also defined as a rational attempt to
reduce or avoid loss or injury (William, Smith, & Young, 1998). Meanwhile, the Institute of
Risk Management defines risk management as a process in which an organization
methodically directs the risks of its activities with the aim of achieving profitability persist in
all portfolios of organizational activities (Collier, Agyei, & Ampomah, 2006).
The objective of risk management is risk management that includes procedures and
methodologies used so that the bank's business activities can still be controlled at an
acceptable limit and benefit the Bank. The implementation of risk management is expected to
provide benefits, both to banks and bank supervisory authorities. For banks, the
implementation of risk management can: (1) increase shareholder value; (2) provide an
overview to bank managers regarding the possibility of bank losses in the future; (3) improve
systematic methods and processes based on the availability of information; (4) used as a basis
for more accurate measurement of bank performance; (5) to assess the risks inherent in
relatively complex instruments or business activities of the bank; and (6) create a solid
infrastructure in order to improve the competitiveness of the Bank (Tampubolon, 2004).
According to Falkner & Hiebl (2015) and Rahman (2015), the risk management
process consists of: (1) risk identification; (2) risk analysis; (3) technique selection; (4)
strategy selection; (5) control. Identification of potential risks must be done continuously and
systematically using various methods or tools such as checklists and financial reports.
Strategic risks should be avoided, and operational risks should be identified and controlled.
With limited resources, risk analysis can be carried out only on risks that have major
consequences with the result of selecting appropriate techniques in dealing with them. All
members of the organization should be informed of the company's risk management
objectives. Then, the organization must determine the standards or performance criteria for
the risk management objectives.
2.4 Bank Financial Performance:
Orazalin, Mahmood, & Lee (2016) in their research on banks listed on the Russian
Stock Exchange (RST) stated that corporate governance has an influence on bank
performance before and after the financial crisis where there is an increase in corporate
governance practices. Lessen, Dentchev, & Roger (2014) further stated that financial
institutions have a systemic impact on the economy and their function in society. This is a
major challenge for business continuity and corporate governance. In this study, it was found
that corporate responsibility and governance have a limited contribution to business
continuity in a sustainable economy.
Battaglia, Fiordelisi, & Ricci's (2016) research is related to the adoption of Enterprise
Risk Management (ERM) in relation to bank risk reduction and bank profitability. By
analyzing banks in Europe during 2005 Through 2013, it was found that after the
implementation of ERM, banks experienced an increase in risk-adjusted profits and an
overall reduction in risk. The way to measure the effectiveness of a bank's risk management
is by measuring the bank's profitability. According to Kuswadi (2005) bank profitability can
be measured through profitability ratios which include net profit margin (NPM), gross profit
margin, Return on investment (ROI), return on Asset (ROA) and return on equity (ROE). At
the micro level, profitability is important in a competitive bank industry. It is not only an
outcome but also a necessity for a successful business in a period of growing competition in
the financial markets. The basic objective of banking management is of course to generate
profits on which the existence, growth, and sustainability of an organization depends
(Menicucci & Paolucci, 2016).
Robertson (2002) in Mahmudi (2007) explains that performance measurement is a
process of assessing work progress towards achieving predetermined goals and objectives.
Jones (2004) states that organizations must constantly change to develop their effectiveness,
these changes are shown to find or develop ways to use existing resources and capabilities to
increase the ability to create value and improve performance. The annual report is one source
of information to get a picture of the company's financial performance. This information
provided by the company's management is one way to provide an overview of the company's
financial performance company performance to stakeholders. According to Harahap (2004),
suggests that "Profitability or also called profitability describes The company's ability to earn
profits through all existing capabilities and sources such as sales activities, cash, capital,
number of employees, number of branches, and so on ". Meanwhile, according to Astuti
(2004) defines "Profitability as the ability of a company to generate profits". One of the most
important measures of profitability is net income. Investors and creditors are very interested
in evaluating the company's ability to generate current profits and own capital.
Banks in Indonesia have higher margins on savings rates and lending rates when
compared to banks in other ASEAN countries. This reflects the need for banks to cover
higher operating costs (between 2.5% and 4% of bank assets, compared to 2% in Malaysia,
and 1% in Singapore). Due to the geography and inefficiency of the Indonesian banking
industry, some of the operating cost to total asset ratios of Indonesian banks are the highest
among banks in the G20. However, Indonesian banks are also the most profitable banks in
the G20 due to net interest margins, averaging 7 percentage points. The average interest rate
on loans is 12%, while the average interest rate paid to depositors is 5% (OECD, 2015).
2.5 Previous Research:
Clarity of direction, originality and usefulness of a research conducted by researchers
will be seen. The researcher is able to trace in depth some of the research conducted now. In
connection with this, this section will discuss some of the findings of previous research.
3.0 Research Methods:
This study uses quantitative methods by using elements in financial statements as
research variables. The population in this study uses secondary data obtained from the annual
reports of companies focused on the banking sector from 2013 to 2015 listed on the Indonesia
Stock Exchange. This secondary data was obtained from the Indonesia Stock Exchange
Website, namely www.idx.co.id.
The sample selection method used in this study is purposive sampling method which
is a method of determining respondents to be sampled based on certain criteria. The sample
selection criteria in this study are (a) The number of companies in the banking sector listed in
2013 to 2015; (b) Companies that publish complete annual reports from 2013 to 2015.
In this study the authors used the influence analysis method, namely linear regression.
Is one of the tools that can be used in predicting future demand based on past data, or to
determine the effect of one independent variable (independent) on one independent variable
(dependent). The software used to help process data in this study includes SPSS (Statistical
Package for Service Solution) for windows version, which is software that functions to
analyze data, perform statistical calculations, both for parametric and non-parametric
statistics on a windows basis (Ghozali, 2013).
3.1 Net Interest Margin and Return on Equity:
Net interest margin which is the ratio between interest generated on loans and interest
paid to borrowers in this study has a significant effect on return on equity. This is in line with
the research of Menicucci & Paolucci (2016) which states that interest net margin (NIM) has
a significant positive effect on profitability. This result is also consistent with the concerns of
banks in Europe related to the intermediary role between lenders and borrowers, where
deposits are transformed into loans. In this case, a high level of lending results in a high level
of profit as well.
Doyran's (2013) research on net interest margins and bank performance in developing
countries states that factors such as management expenses (operating cost
efficiency/inefficiency), leverage, and liquidity are important factors related to NIM and ROA
in the banking industry in Argentina. High high levels of profitability are associated with
banks that have less debt and therefore exhibit a lower debt to total assets ratio. Finally, high
NIM levels can also be associated with high operating expenses.
3.2 Net Performing Loan and Return on Equity:
Loan performance in microfinance institutions can be linked to financial management
practices, especially to the institution's competitive advantage. In Nkundabanyanga's
research, Akankunda, Nalukenge, & Tusiime (2017) found that there is a positive relationship
between competitive advantage and loan performance. Mclver (2005) identified several real
and financial options that could help transfer non-performing loans from state-owned
commercial banks to asset management companies. This ensures that non-performing assets
remain under the control of commercial banks. The results of Menicucci & Paolucci (2016)
state that not all determinant variables have a significant effect on the profitability of a bank.
The results showed that there is uncertainty and diversity between the loan ratio (LOAN) and
the measurement of profitability used where the relationship is positive and insignificant.
This indicates that with the increase in the value of loans issued, the higher the level of
profitability.
However, since the results of the study were not significant, the relationship between
these two variables cannot be stated with certainty.
3.3 Capital Adequacy Ratio and Return on Equity:
Menicucci & Paolucci (2016) stated that the amount of deposits to total assets has no
significant effect on profitability when measured by NIM. However, Capital Adequacy Ratio
(CAR) has a positive significant effect when it comes to profitability. This means that well-
capitalized banks will experience higher returns with reduced funding costs and face a lower
risk of insolvency. Conversely, a lower capital ratio in banking implies greater debt and risk,
and higher borrowing costs. This is in accordance with the results of the author's research
which states that the Capital Adequacy Ratio has a significant effect on profitability.
3.4 Loan Deposit Ratio and Return on Equity:
Liquidity risk affects not only a bank's performance but also its reputation. A bank
may lose the trust of its customers if funds are not available when they are needed. In
addition, low liquidity levels may lead to penalties by the financial authorities. For this
reason, it is important for banks to maintain their liquidity levels (Arif & Anees, 2012). A
liquidity crisis can develop into an overall capital crisis in a relatively short period of time.
Banks can avoid this crisis by focusing on liquidity ratios so that it has no incidental effect on
the company's financial position (Goddard, Molyneux, & Wilson, 2009).
Based on the above discussion, it can be interpreted that banks must maintain liquidity
levels due to two main factors: (1) customer confidence, and (2) regulatory compliance.
Liquidity levels that are not as expected can lead to penalties for compliance violations and
ultimately can cause customers to lose trust. Therefore, the liquidity level of a bank does not
have a significant influence on profitability due to the need to maintain liquidity regardless of
the level of profitability.
3.5 Research Model and Interpretation:
The important role of banks emphasizes that in carrying out their functions, banks
need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an unstable
financial system, especially if it results in a crisis, requires very high costs to overcome. The
stricter the regulations applied, the greater the level of stability in a system while still
considering the level of liquidity and distress of the Bank (Polyzos, 2015).
The banking system and its stability must be maintained with measures that do not
specifically target financial institutions. These institutions do not operate in isolation from the
rest of the economy but have a distinct role to play in maintaining economic stability and
prosperity. Regulators should support this dual role without losing sight of the fact that
Shareholders often only focus on profitability (Polyzos, 2015). This is also corroborated by
Kale, Eken, & Selimler's (2015) research indicating that strict regulation, frequent
monitoring, more restrictions, strengthened supervision, and more capital and reforms have a
positive effect on efficiency. Although deregulation and limited supervision sometimes lead
to efficiency gains, the results tend to be unsustainable due to an unstable macroeconomic
environment and/or poor management practices resulting from unspecified supervision
conditions.
It is also worth noting that too much regulatory burden can make the regulations
issued bind too tightly which ultimately increases the possibility of organizational bankruptcy
in the event of a crisis threat (Aldasoro, Gatti, & Faia, 2016). Internal factors are more
effectively related to the productivity level of a bank than internal factors, indicating that the
quality of management plays a more important role than regulations and monitoring by
regulators (Kale, Eken, & Selimler, 2015).
4.0 Conclusions and Suggestions
In understanding the role of risk management in the survival of the banking industry,
this study tries to measure the risks that occur in companies such as interest rate risk, credit
risk, solvency & capital risk, and liquidity, each of which is proxied by the ratio of NIM,
NPL, CAR, and LDR.
The bank's financial performance is measured by the profitability ratio, namely ROE.
From the research results, it shows the application of Risk management simultaneously has a
significant and positive effect on the company's financial performance. And when explained
in more detail, this study also provides results that NIM and CAR ratios have a significant
effect on ROE, while NPL and LDR have not provided sufficient influence on ROE.
Therefore, in order to increase ROE, both banks that have gone public and banks that
have not gone public must be able to continue to maintain and increase the value of NIM and
CAR. This can be done through optimizing bank performance through bank interest income
or increasing fee-based income, which can increase bank ROE. Then in providing credit, go
public banks must always be selective and careful in choosing loan debtors so that the loans
that have been channeled can avoid bad credit, one solution is to tighten the loan conditions
with 5C (Character, Capability, Capital, Collateral, and Condition of economy). Banks also
need to carry out strict supervision on loans that have been running and minimize bad debts
so that the NPL value is less than 5% and CAR regulations are more concerned.
In addition, banks must be able to manage LDR by continuing to maintain the amount
of LDR to stay within the range of 78%-110%. This can be done by maximizing savings
collection and balanced with optimal lending without ignoring the applicable rules to avoid
bad debts so that maximum credit interest income is obtained. (Ernawati, 2011) From the
results of the research conducted, it can provide advice to the banking industry in Indonesia
to always be aware of unpredictable banking risks. Running risk management appropriately
and good governance will be one way for banks to survive and even excel among the modern
business world that is always dynamic.
For the Indonesian government, it is expected to always pay attention to regulations
regarding banking so that this industry can properly carry out its function to improve the
welfare of society. Regulations relating to the establishment of a bank should also be strictly
regulated, so as to avoid the possibility of "failed banks" due to weak foundations when a
new bank is established.
For the people of Indonesia, before applying for credit or storing wealth in banks,
hopefully the results of this study can be a point of public awareness to be more sensitive
about the health of a banking industry, so as not to be trapped in a banking environment that
is not conducive and detrimental to society.
For future research, it is hoped that the sample used can be more specific, for example
using a sample of the non-government banking industry in order to clearly examine the health
and ability of a bank to face risks and their impact on the financial performance of the
banking industry.
Sustainability and development are closely linked to a sound and healthy banking
sector. Because of this, the banking system has always been an important issue not only for
local governments but also international organizations and regulators. A dynamic
environment will lead to new developments in the market, and will require new regulations
(Kale, Eken, & Selimler, 2015). The weaknesses of the global financial system can be
addressed by using banking union as a key tool to improve and streamline crisis management.
(Carbo-Valverde, Benink, Berglund, & Wihlborg, 2015). The Financial Services Authority of
the Republic of Indonesia states that the external and internal banking environment is
experiencing rapid development which will be followed by increasingly complex risks for
banking business activities. This requires good governance practices and the functions of
identifying, measuring, monitoring, and controlling bank risk (OJK, 2016).
A bank is a company that performs an intermediation function on funds received from
customers (Bank Indonesia, n.d.). Indonesia's financial system is dominated by banks, which
held 79% of financial sector assets in 2013, compared to 50% in Malaysia. Insurance
companies held 10% of financial sector assets and less than 3% were held by pension funds.
OECD (2015) suggests that Indonesia needs to accelerate the deepening and broadening of its
financial system by increasing formal domestic savings (which reflects a low-inflation
economy) and facilitating the mobilization of funds from non-bank institutions to finance
investment, particularly in infrastructure.
In 2016, Indonesia's financial sector remained in good shape and was one of the most
favorable globally. The non-performing loan (NPL) ratio reached 3.2% in July 2016, which
was mostly in banks that hold the majority of the corporate lending portfolio. In the period
ahead, the financial sector will face challenges such as below-average economic growth, low
commodity prices, pressure from the government, and a lack of transparency to lower lending
rates, and the depreciation of the rupiah, thus weighing on asset quality and business
profitability. However, good capital adequacy and adequate liquidity will protect against the
risk of deterioration, and lower interest rates may provide additional protection (OECD,
2016).
If a bank fails, the impact will extend to customers and institutions that deposit their
funds or invest their capital in the bank, and will create a chain effect both domestically and
internationally. The important role of banks emphasizes that in carrying out their functions,
banks need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an
unstable financial system, especially if it results in a crisis, requires very high costs to
overcome. This was experienced by Indonesia during the 1998 financial crisis where it took a
lot of time and money to revive public confidence in the financial system. Based on the
background description of the problem above, researchers want to analyze the importance of
implementing and measuring risk management in the banking industry and its effect on the
company's financial performance.
This study aims to determine whether the measurement of elements in risk
management has a significant effect on the profitability of the banking industry in Indonesia
for the period 2013-2015 which can be used in measuring a risk management on the
condition of the financial performance of banking companies.
2.0 Literature Review:
2.1 Agency Theory:
The basic assumption of agency theory is that individuals will maximize their future interests
and have the resources and innovation to do so. The issue raised by agency theory is how a
manager or shareholder can benefit from a corporate action (Schroeder, Clark, & Cathey,
2014). The emphasis in the theory is that the interests of managers and shareholders are often
not the same. Agency here is defined as a consensual relationship between two parties where
one party agrees to act on behalf of the other party.
In agency theory, there is a built-in assumption that there will be a conflict of interest
between the owner (principal) and the manager (agent) due to the existence of incompatible
interests between the 2 (two) parties. This agency relationship creates costs for the owner
which include: (1) supervision of the organization; (2) binding of managers; and (3)
monitoring of the organization (3) residual loss. The expenditure on supervisory activities is
intended to enable the principal to control the behavior of the agents. Tying-up costs are
defined as expenditures to ensure that agents will not make decisions that could harm
shareholders. Finally, even though the principal has incurred the above two types of costs, the
agent can still take actions that can reduce shareholder value where this loss is referred to as
residual loss (Schroeder, Clark, & Cathey, 2014).
2.2 Risk :
According to Vaughan in Sugianto (2014), defines risk into three definitions, namely:
(1) risk is the chance of loss; (2) risk is the possibility of loss; and (3) risk is uncertainty. The
risk categories themselves in banking are (Njogo, 2012): (1) Credit risk, which is the risk of
default by a debtor on a loan or credit (principal or interest or both): (1) Liquidity risk, which
is the risk of a bank's ability to fund increases in assets and meet liabilities as they come due
without incurring unacceptable losses; (2) Interest rate risk, which is the risk (variability in
value) posed by interest bearing assets, such as loans or bonds, due to variability in interest
rates; (3) Market risk, which is the risk that exists in the market which is usually seen using
the Value at Risk (VaR) tool; (4) Operational risk, which is the potential for financial loss as a
result of disruptions in the daily operational process, one of which is unexpected earnings; (5)
Legal risk, which is the risk arising from the potential that occurs due to an adverse lawsuit in
terms of valuation that can disrupt or affect the operations or conditions of the banking
organization; (7) Reputational risk, which is the risk that arises due to the bank's reputation
that may destroy the value of the company as reflected in the shares held by shareholders.
Commercial banks are in a risky business that has received extensive attention from
many quarters. Risk in the context of banking arises from any transaction or business
decision that contains risk uncertainty of the outcome. Basically, the types of risks in banks
include credit risk, market risk, operational risk, liquidity risk, interest rate risk, foreign
exchange risk, solvency risk, and off-balance sheet risk and a holistic approach to these risks
can create value for shareholders. Risk management is more important in the financial sector
than in any other sector of the economy (Falkner & Hiebl, 2015). Controlling the unique risks
of banking can also be found in the IFSB (Islamic Financial Services Board) Guiding
Principle of Risk Management (Rahman, 2015).
2.3 Risk Management:
Firmansyah (2010) said that risk management is a process of anticipating risks so that
losses do not occur to the organization. Bank Indonesia in Bank Indonesia Regulation No.
11/25/PBI/2009 regarding the amendment to Bank Indonesia Regulation No. 5/8/PBI/2003
concerning the Implementation of Risk Management, risk is the potential loss due to the
occurrence of certain events and risk management is a series of methodologies and
procedures used to identify, measure, monitor, and control risks arising from all bank business
activities (Bank Indonesia, 2009). Risk management is also defined as a rational attempt to
reduce or avoid loss or injury (William, Smith, & Young, 1998). Meanwhile, the Institute of
Risk Management defines risk management as a process in which an organization
methodically directs the risks of its activities with the aim of achieving profitability persist in
all portfolios of organizational activities (Collier, Agyei, & Ampomah, 2006).
The objective of risk management is risk management that includes procedures and
methodologies used so that the bank's business activities can still be controlled at an
acceptable limit and benefit the Bank. The implementation of risk management is expected to
provide benefits, both to banks and bank supervisory authorities. For banks, the
implementation of risk management can: (1) increase shareholder value; (2) provide an
overview to bank managers regarding the possibility of bank losses in the future; (3) improve
systematic methods and processes based on the availability of information; (4) used as a basis
for more accurate measurement of bank performance; (5) to assess the risks inherent in
relatively complex instruments or business activities of the bank; and (6) create a solid
infrastructure in order to improve the competitiveness of the Bank (Tampubolon, 2004).
According to Falkner & Hiebl (2015) and Rahman (2015), the risk management
process consists of: (1) risk identification; (2) risk analysis; (3) technique selection; (4)
strategy selection; (5) control. Identification of potential risks must be done continuously and
systematically using various methods or tools such as checklists and financial reports.
Strategic risks should be avoided, and operational risks should be identified and controlled.
With limited resources, risk analysis can be carried out only on risks that have major
consequences with the result of selecting appropriate techniques in dealing with them. All
members of the organization should be informed of the company's risk management
objectives. Then, the organization must determine the standards or performance criteria for
the risk management objectives.
2.4 Bank Financial Performance:
Orazalin, Mahmood, & Lee (2016) in their research on banks listed on the Russian
Stock Exchange (RST) stated that corporate governance has an influence on bank
performance before and after the financial crisis where there is an increase in corporate
governance practices. Lessen, Dentchev, & Roger (2014) further stated that financial
institutions have a systemic impact on the economy and their function in society. This is a
major challenge for business continuity and corporate governance. In this study, it was found
that corporate responsibility and governance have a limited contribution to business
continuity in a sustainable economy.
Battaglia, Fiordelisi, & Ricci's (2016) research is related to the adoption of Enterprise
Risk Management (ERM) in relation to bank risk reduction and bank profitability. By
analyzing banks in Europe during 2005 Through 2013, it was found that after the
implementation of ERM, banks experienced an increase in risk-adjusted profits and an
overall reduction in risk. The way to measure the effectiveness of a bank's risk management
is by measuring the bank's profitability. According to Kuswadi (2005) bank profitability can
be measured through profitability ratios which include net profit margin (NPM), gross profit
margin, Return on investment (ROI), return on Asset (ROA) and return on equity (ROE). At
the micro level, profitability is important in a competitive bank industry. It is not only an
outcome but also a necessity for a successful business in a period of growing competition in
the financial markets. The basic objective of banking management is of course to generate
profits on which the existence, growth, and sustainability of an organization depends
(Menicucci & Paolucci, 2016).
Robertson (2002) in Mahmudi (2007) explains that performance measurement is a
process of assessing work progress towards achieving predetermined goals and objectives.
Jones (2004) states that organizations must constantly change to develop their effectiveness,
these changes are shown to find or develop ways to use existing resources and capabilities to
increase the ability to create value and improve performance. The annual report is one source
of information to get a picture of the company's financial performance. This information
provided by the company's management is one way to provide an overview of the company's
financial performance company performance to stakeholders. According to Harahap (2004),
suggests that "Profitability or also called profitability describes The company's ability to earn
profits through all existing capabilities and sources such as sales activities, cash, capital,
number of employees, number of branches, and so on ". Meanwhile, according to Astuti
(2004) defines "Profitability as the ability of a company to generate profits". One of the most
important measures of profitability is net income. Investors and creditors are very interested
in evaluating the company's ability to generate current profits and own capital.
Banks in Indonesia have higher margins on savings rates and lending rates when
compared to banks in other ASEAN countries. This reflects the need for banks to cover
higher operating costs (between 2.5% and 4% of bank assets, compared to 2% in Malaysia,
and 1% in Singapore). Due to the geography and inefficiency of the Indonesian banking
industry, some of the operating cost to total asset ratios of Indonesian banks are the highest
among banks in the G20. However, Indonesian banks are also the most profitable banks in
the G20 due to net interest margins, averaging 7 percentage points. The average interest rate
on loans is 12%, while the average interest rate paid to depositors is 5% (OECD, 2015).
2.5 Previous Research:
Clarity of direction, originality and usefulness of a research conducted by researchers
will be seen. The researcher is able to trace in depth some of the research conducted now. In
connection with this, this section will discuss some of the findings of previous research.
3.0 Research Methods:
This study uses quantitative methods by using elements in financial statements as
research variables. The population in this study uses secondary data obtained from the annual
reports of companies focused on the banking sector from 2013 to 2015 listed on the Indonesia
Stock Exchange. This secondary data was obtained from the Indonesia Stock Exchange
Website, namely www.idx.co.id.
The sample selection method used in this study is purposive sampling method which
is a method of determining respondents to be sampled based on certain criteria. The sample
selection criteria in this study are (a) The number of companies in the banking sector listed in
2013 to 2015; (b) Companies that publish complete annual reports from 2013 to 2015.
In this study the authors used the influence analysis method, namely linear regression.
Is one of the tools that can be used in predicting future demand based on past data, or to
determine the effect of one independent variable (independent) on one independent variable
(dependent). The software used to help process data in this study includes SPSS (Statistical
Package for Service Solution) for windows version, which is software that functions to
analyze data, perform statistical calculations, both for parametric and non-parametric
statistics on a windows basis (Ghozali, 2013).
3.1 Net Interest Margin and Return on Equity:
Net interest margin which is the ratio between interest generated on loans and interest
paid to borrowers in this study has a significant effect on return on equity. This is in line with
the research of Menicucci & Paolucci (2016) which states that interest net margin (NIM) has
a significant positive effect on profitability. This result is also consistent with the concerns of
banks in Europe related to the intermediary role between lenders and borrowers, where
deposits are transformed into loans. In this case, a high level of lending results in a high level
of profit as well.
Doyran's (2013) research on net interest margins and bank performance in developing
countries states that factors such as management expenses (operating cost
efficiency/inefficiency), leverage, and liquidity are important factors related to NIM and ROA
in the banking industry in Argentina. High high levels of profitability are associated with
banks that have less debt and therefore exhibit a lower debt to total assets ratio. Finally, high
NIM levels can also be associated with high operating expenses.
3.2 Net Performing Loan and Return on Equity:
Loan performance in microfinance institutions can be linked to financial management
practices, especially to the institution's competitive advantage. In Nkundabanyanga's
research, Akankunda, Nalukenge, & Tusiime (2017) found that there is a positive relationship
between competitive advantage and loan performance. Mclver (2005) identified several real
and financial options that could help transfer non-performing loans from state-owned
commercial banks to asset management companies. This ensures that non-performing assets
remain under the control of commercial banks. The results of Menicucci & Paolucci (2016)
state that not all determinant variables have a significant effect on the profitability of a bank.
The results showed that there is uncertainty and diversity between the loan ratio (LOAN) and
the measurement of profitability used where the relationship is positive and insignificant.
This indicates that with the increase in the value of loans issued, the higher the level of
profitability.
However, since the results of the study were not significant, the relationship between
these two variables cannot be stated with certainty.
3.3 Capital Adequacy Ratio and Return on Equity:
Menicucci & Paolucci (2016) stated that the amount of deposits to total assets has no
significant effect on profitability when measured by NIM. However, Capital Adequacy Ratio
(CAR) has a positive significant effect when it comes to profitability. This means that well-
capitalized banks will experience higher returns with reduced funding costs and face a lower
risk of insolvency. Conversely, a lower capital ratio in banking implies greater debt and risk,
and higher borrowing costs. This is in accordance with the results of the author's research
which states that the Capital Adequacy Ratio has a significant effect on profitability.
3.4 Loan Deposit Ratio and Return on Equity:
Liquidity risk affects not only a bank's performance but also its reputation. A bank
may lose the trust of its customers if funds are not available when they are needed. In
addition, low liquidity levels may lead to penalties by the financial authorities. For this
reason, it is important for banks to maintain their liquidity levels (Arif & Anees, 2012). A
liquidity crisis can develop into an overall capital crisis in a relatively short period of time.
Banks can avoid this crisis by focusing on liquidity ratios so that it has no incidental effect on
the company's financial position (Goddard, Molyneux, & Wilson, 2009).
Based on the above discussion, it can be interpreted that banks must maintain liquidity
levels due to two main factors: (1) customer confidence, and (2) regulatory compliance.
Liquidity levels that are not as expected can lead to penalties for compliance violations and
ultimately can cause customers to lose trust. Therefore, the liquidity level of a bank does not
have a significant influence on profitability due to the need to maintain liquidity regardless of
the level of profitability.
3.5 Research Model and Interpretation:
The important role of banks emphasizes that in carrying out their functions, banks
need to be regulated properly (Bank Indonesia, n.d.). Experience shows that an unstable
financial system, especially if it results in a crisis, requires very high costs to overcome. The
stricter the regulations applied, the greater the level of stability in a system while still
considering the level of liquidity and distress of the Bank (Polyzos, 2015).
The banking system and its stability must be maintained with measures that do not
specifically target financial institutions. These institutions do not operate in isolation from the
rest of the economy but have a distinct role to play in maintaining economic stability and
prosperity. Regulators should support this dual role without losing sight of the fact that
Shareholders often only focus on profitability (Polyzos, 2015). This is also corroborated by
Kale, Eken, & Selimler's (2015) research indicating that strict regulation, frequent
monitoring, more restrictions, strengthened supervision, and more capital and reforms have a
positive effect on efficiency. Although deregulation and limited supervision sometimes lead
to efficiency gains, the results tend to be unsustainable due to an unstable macroeconomic
environment and/or poor management practices resulting from unspecified supervision
conditions.
It is also worth noting that too much regulatory burden can make the regulations
issued bind too tightly which ultimately increases the possibility of organizational bankruptcy
in the event of a crisis threat (Aldasoro, Gatti, & Faia, 2016). Internal factors are more
effectively related to the productivity level of a bank than internal factors, indicating that the
quality of management plays a more important role than regulations and monitoring by
regulators (Kale, Eken, & Selimler, 2015).
4.0 Conclusions and Suggestions
In understanding the role of risk management in the survival of the banking industry,
this study tries to measure the risks that occur in companies such as interest rate risk, credit
risk, solvency & capital risk, and liquidity, each of which is proxied by the ratio of NIM,
NPL, CAR, and LDR.
The bank's financial performance is measured by the profitability ratio, namely ROE.
From the research results, it shows the application of Risk management simultaneously has a
significant and positive effect on the company's financial performance. And when explained
in more detail, this study also provides results that NIM and CAR ratios have a significant
effect on ROE, while NPL and LDR have not provided sufficient influence on ROE.
Therefore, in order to increase ROE, both banks that have gone public and banks that
have not gone public must be able to continue to maintain and increase the value of NIM and
CAR. This can be done through optimizing bank performance through bank interest income
or increasing fee-based income, which can increase bank ROE. Then in providing credit, go
public banks must always be selective and careful in choosing loan debtors so that the loans
that have been channeled can avoid bad credit, one solution is to tighten the loan conditions
with 5C (Character, Capability, Capital, Collateral, and Condition of economy). Banks also
need to carry out strict supervision on loans that have been running and minimize bad debts
so that the NPL value is less than 5% and CAR regulations are more concerned.
In addition, banks must be able to manage LDR by continuing to maintain the amount
of LDR to stay within the range of 78%-110%. This can be done by maximizing savings
collection and balanced with optimal lending without ignoring the applicable rules to avoid
bad debts so that maximum credit interest income is obtained. (Ernawati, 2011) From the
results of the research conducted, it can provide advice to the banking industry in Indonesia
to always be aware of unpredictable banking risks. Running risk management appropriately
and good governance will be one way for banks to survive and even excel among the modern
business world that is always dynamic.
For the Indonesian government, it is expected to always pay attention to regulations
regarding banking so that this industry can properly carry out its function to improve the
welfare of society. Regulations relating to the establishment of a bank should also be strictly
regulated, so as to avoid the possibility of "failed banks" due to weak foundations when a
new bank is established.
For the people of Indonesia, before applying for credit or storing wealth in banks,
hopefully the results of this study can be a point of public awareness to be more sensitive
about the health of a banking industry, so as not to be trapped in a banking environment that
is not conducive and detrimental to society.
For future research, it is hoped that the sample used can be more specific, for example
using a sample of the non-government banking industry in order to clearly examine the health
and ability of a bank to face risks and their impact on the financial performance of the
banking industry.
