Determinant Factors that affect Foreign Banks Profitability: An Evidence from Indonesia

Ruhul, Fajriana and Muhammad, Roni (2021) Determinant Factors that affect Foreign Banks Profitability: An Evidence from Indonesia. In: Proceedings of the 11th Annual International Conference on Industrial Engineering and Operations Management Singapore, March 7-11, 2021, March 7-11, 2021, Singapore.

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Abstract

During the financial crisis, foreign banks show their resistance and obtain more profit than all domestic banks, regardless of their ownership structure. Numerous previous studies have found that foreign banks are more profitable and more efficient than domestic banks in emerging markets. Therefore, this study aims to examine the determinant factors that affect foreign banks profitability in Indonesia. This study uses panel data series collected from two sources, i.e. Bank Indonesia (BI) and Otoritas Jasa Moneter (OJS) Institutions for 2014 to 2018. A total of 9 foreign banks operated in Indonesia and selected using purposive sampling. As usual, we applied three common models under panel data analysis, i.e. Pool Least Square, Fixed Effect Model and Random Effect Model. This study found that credit distribution and non-performing loans have a significant negative effect on foreign banks profitability. Meanwhile, the gross domestic product has a significant positive effect on foreign banks profitability. Besides that, the rate of credit interest does not affect foreign banks profitability. The results indicated that foreign banks operating in Indonesia in providing credit must be very prudent because they could reduce profitability and increase the risk of default. It because foreign banks tended to use foreign currencies in giving credit. However, if in good gross domesticity condition, foreign banks' profitability was also good because of the increasing prosperity felt by the Indonesian people, especially market players.

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