Does Regional Economy and Market Concentration Have an Impact on Stability and Profitability in Indonesian Regional Banking?

  • Sapto Jumono, Chajar Matari Fath Mala, Hermanto, Djoko Roespinoedji

Abstract

This study aims to investigate the influence of regional economy and market concentration on stability, credit risk, and profitability of Indonesian Regional Development Banking. We use concentration-stabilization hypothesis and structure-conduct-performance (SCP) hypothesis as the grand theory. The data used is derived from the quarterly publication financial data of Indonesian RDB banks from 2003 to 2017. This study uses saturated sampling as the basis of data collection. We employ GMM data panel regression as the research method. This research results in two main findings. First, the banking market concentration in Indonesia has a positive impact on the stability and profitability of RDB, which means that the concentration-stability theory is applied. Second, market share has a positive effect on stability, however it has an advers effect on non-performing loans and the profitability of RDB. Based on the results, it can be concluded that regional macroeconomic conditions, market conditions, and banking characteristics have a significant role in the stability and profitability of RDB. Despite these findings, there are also influences from economic, financial, and banking systems on the stability and performance of RDB in Indonesia. To the best of our knowledge, what makes this research novel is its attempt to examine the stability and profitability of assets that come from changes in companites’ external and internal environment. The findings can be used to anticipate the banking behavior in optimizing performance. In the perspective of macroeconomic policy, conceptually and empirically Indonesian banking policies have proven to be more oriented to stability and tend to sacrifice the aspects of efficiency and competition climate.

Published
2020-06-01