THE ROLE OF GOVERNANCE IN MODERATING CREDIT RISK AND CAPITAL ADEQUACY ON FINANCIAL PERFORMANCE IN INDONESIAN BANKS
DOI:
https://doi.org/10.31539/costing.v8i2.14021Keywords:
Credit Risk, Capital Adequacy Ratio, Corporate Governance, Financial PerformanceAbstract
This study seeks to contribute to the existing corporate governance literature by examining its role as a moderator on the relationship between credit risk (CR), represented with loans to total assets (LTA) and non-performing loans (NPLs), as well as capital adequacy ratio (CAR), on financial performance (FP) of banks listed in the Indonesia Stock Exchange (IDX). This study uses quantitative data collected from the annual reports of 45 banks listed on the IDX, utilizing panel data regression analysis techniques of total 180 firm-year observations within the 2020-2023 period, with fixed and random effect model to examine the hypotheses. The study’s findings demonstrated differing results between the variables, in which both LTA and CAR have a significant positive influence on return on equity (ROE), whereas it has inverse effects on Tobin's Q. Moreover, the regression results showed that corporate governance (CG) moderated the relationship between LTA and banks FP, as it weakens LTA effect on ROE but strengthens it on Tobin's Q. The study provides insights for bank managers and authorities alike in managing the proportion of LTA and the CAR while determine the optimal board size to stabilize banks performance better, as well as for investors to consider the importance of CR & CAR, as well as quality of governance in making investment decisions.
References
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Al-Okaily, M., Alkhwaldi, A. F., Abdulmuhsin, A. A., Alqudah, H., & Al-Okaily, A. (2023). Cloud-based accounting information systems usage and its impact on Jordanian SMEs’ performance: the post-COVID-19 perspective. Journal of Financial Reporting and Accounting, 21(1), 126–155. https://doi.org/10.1108/JFRA-12-2021-0476
Baltas, K. N., & Liñares‐Zegarra, J. M. (2024). Efficiency and financial risk management practices of microfinance institutions. International Journal of Finance & Economics. https://doi.org/10.1002/ijfe.2956
Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The Relationship between Environmental, Social, and Financial Performance in the Banking Sector: A European Study. Journal of Cleaner Production, 290. https://doi.org/10.1016/j.jclepro.2021.125791
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Ebenezer, O. O., & Omar, W. A. W. (2015). The Empirical Effects of Credit Risk on Profitability of Commercial Banks: Evidence from Nigeria. Article in International Journal of Science and Research, 5. https://doi.org/10.21275/ART2016315
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Fitriani, N. N. (2024). PENGARUH LOANS TO TOTAL ASSETS (LOTA), RETURN ON ASSETS (ROA), INFLASI, DAN BI-RATE TERHADAP CAPITAL BUFFER BANK UMUM SYARIAH DI INDONESIA TAHUN 2019-2023. Universitas Islam Negeri Raden Intan Lampung.
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Hasan, S. M., Tawfiq, T. T., Hasan, M., & Islam, K. M. A. (2024). Corporate governance dynamics in financial institution performance: A panel data analysis. Investment Management and Financial Innovations, 21(3), 292–303. https://doi.org/10.21511/imfi.21(3).2024.24
Ko, C., Lee, P., & Anandarajan, A. (2019). The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance. International Journal of Accounting & Information Management, 27(1), 96–110. https://doi.org/10.1108/IJAIM-05-2017-0070
Lidiawan, A. R., Djunaedi, Susilaningsih, N., & Cahyani, R. G. A. (2022). Loan To Deposit Ratio Assessment Of State-Owned Banks Based On Financial Ratios Penilaian Loan To Deposit Ratio Bank BUMN (Persero) Berdasarkan Rasio Keuangan. Management Studies and Entrepreneurship Journal, 3(6), 3709–3724. https://doi.org/10.37385/msej.v3i6.1201
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Mawutor, J. K. M., & Fred, A. (2015). Assessment of Efficiency and Profitability of Listed Banks in Ghana. Accounting and Finance Research, 4(1). https://doi.org/10.5430/afr.v4n1p164
Million, G., Matewos, K., & Sujata, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African Journal of Business Management, 9(2), 59–66. https://doi.org/10.5897/ajbm2013.7171
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Ngatno, Apriatni, E. P., & Youlianto, A. (2021). Moderating effects of corporate governance mechanism on the relation between capital structure and firm performance. Cogent Business and Management, 8(1). https://doi.org/10.1080/23311975.2020.1866822
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Nurbaiti Pertiwi, S., Henry Wicaksono, I., Setyo Lestari, H., & Margaretha Leon, F. (2023). THE EFFECT OF DIGITIZATION TRANSFORMATION ON FINANCIAL PERFORMANCE: A CASE STUDY OF BANKING COMPANIES IN INDONESIA. Journal Research of Social Science, Economics, and Management, 03(03), 620–635. https://doi.org/10.59141/jrssem.v3i03.547
Nurtrontong, P., Rahayu, S. M., & Handayani, S. R. (2021). HOW CORPORATE GOVERNANCE, CREDIT RISK AND PERFORMANCE LINK TOGETHER? The International Journal of Accounting and Business Society, 29(3).
Opoku, R. T., Angmor, P. L., & Boadi, L. A. (2016). Credit Risk and Bank Profitability: Evidence from Ghana Stock Exchange. Journal for Studies in Management and Planning, 2(3), 89–96. https://www.researchgate.net/publication/321005946
Palaniappan, G. (2017). Determinants of corporate financial performance relating to board characteristics of corporate governance in Indian manufacturing industry. European Journal of Management and Business Economics, 26(1), 67–85. https://doi.org/10.1108/EJMBE-07-2017-005
Pareek, R., Sahu, T. N., & Gupta, A. (2023). Gender diversity and corporate sustainability performance: empirical evidence from India. Vilakshan - XIMB Journal of Management, 20(1), 140–153. https://doi.org/10.1108/xjm-10-2020-0183
Singh, S. K., Basuki, B., & Setiawan, R. (2021). The Effect of Non-Performing Loan on Profitability: Empirical Evidence from Nepalese Commercial Banks. Journal of Asian Finance, Economics and Business, 8(4), 709–716. https://doi.org/10.13106/jafeb.2021.vol8.no4.0709
Sochib, Setyo Liyundira, F., & Yulianti, A. (2023). The Influence of LDR, NPL and ROA on PBV of Conventional National Commercial Bank’s in Indonesia. Progress Conference, 6(1). http://proceedings.itbwigalumajang.ac.id/index.php/progress
S&P Global Ratings. (2023). Supranationals. Available from: Https:// Www.Spglobal.Com/Ratings/En/Sector/Governments/Supranationals. https:// www.spglobal.com/ratings/en/sector/governments/supranationals
Srouji, A. F., Hamdallah, M. E., Al-Hamadeen, R., Al-Okaily, M., & Elamer, A. A. (2023). The impact of green innovation on sustainability and financial performance: Evidence from the Jordanian financial sector. Business Strategy and Development, 6(4), 1037–1052. https://doi.org/10.1002/bsd2.296
Vellati, D., & Oktaviani, M. (2024). Pengaruh Return On Asset, Public Ownership, dan Loan To Deposit Ratio Terhadap Tobin’s Q Pada Perusahaan Perbankan BUMN. Improvement: Jurnal Manajemen Dan Bisnis, 4(1), 86–98. www.idx.co.id
Alamsyah, S., & MN, N. (2022). Analisis Kinerja Keuangan Bank Konvensional dan Bank Syariah yang Terdaftar di BEI. Jurnal Manajerial Dan Kewirausahaan, 4(3), 806–815. https://doi.org/10.24912/jmk.v4i3.19775
Al-Eitan, G. N., Albayt University Tareq Bani-Khalid, A. O., & al, A. (2019). CREDIT RISK AND FINANCIAL PERFORMANCE OF THE JORDANIAN COMMERCIAL BANKS: A PANEL DATA ANALYSIS. Academy of Accounting and Financial Studies Journal, 23(5).
Al-Okaily, M., Alkhwaldi, A. F., Abdulmuhsin, A. A., Alqudah, H., & Al-Okaily, A. (2023). Cloud-based accounting information systems usage and its impact on Jordanian SMEs’ performance: the post-COVID-19 perspective. Journal of Financial Reporting and Accounting, 21(1), 126–155. https://doi.org/10.1108/JFRA-12-2021-0476
Baltas, K. N., & Liñares‐Zegarra, J. M. (2024). Efficiency and financial risk management practices of microfinance institutions. International Journal of Finance & Economics. https://doi.org/10.1002/ijfe.2956
Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The Relationship between Environmental, Social, and Financial Performance in the Banking Sector: A European Study. Journal of Cleaner Production, 290. https://doi.org/10.1016/j.jclepro.2021.125791
Bhatt, T. K., Wang, W., Dang, X., & Jan, S. Q. (2024). The role of corporate governance structures in mediating the relationship between external supervision, credit appraisal measurement, capital adequacy, and performance of commercial banks in Nepal. PLoS ONE, 19(6 June). https://doi.org/10.1371/journal.pone.0303926
Bhattacharyya, D., Dietz, M., Edlich, A., Höll, R., Mehta, A., Weintraub, B., & Windhagen, E. (2023). Global banking annual review 2023: The great banking transition. McKinsey & Company. https://www.mckinsey.com
Chiappini, R., Groslambert, B., & Bruno, O. (2024). A method to measure bank output while excluding credit risk and retaining liquidity effects. The Quarterly Review of Economics and Finance, 94, 167–179. https://doi.org/10.1016/j.qref.2024.01.007ï
Ebenezer, O. O., & Omar, W. A. W. (2015). The Empirical Effects of Credit Risk on Profitability of Commercial Banks: Evidence from Nigeria. Article in International Journal of Science and Research, 5. https://doi.org/10.21275/ART2016315
Evoney, G. D., & Margaretha, F. (2024). The Effect of Credit Risk Management on the Financial Performance of Banks Listed on the IDX. Jurnal Ilmiah Manajemen Kesatuan, 12(4), 933–938. https://doi.org/10.37641/jimkes.v12i4.2658
Feng, Y., Hassan, A., & Elamer, A. A. (2020). Corporate governance, ownership structure and capital structure: Evidence from Chinese real estate listed companies. International Journal of Accounting & Information Management. https://doi.org/10.1108/IJAIM-04
Fitriani, N. N. (2024). PENGARUH LOANS TO TOTAL ASSETS (LOTA), RETURN ON ASSETS (ROA), INFLASI, DAN BI-RATE TERHADAP CAPITAL BUFFER BANK UMUM SYARIAH DI INDONESIA TAHUN 2019-2023. Universitas Islam Negeri Raden Intan Lampung.
Galvis-Ciro, J. C., de Moraes, C. O., & García-Lopera, J. (2023). The Macroeconomic Impact on Bank’s Portfolio Credit Risk: The Colombian Case. Emerging Markets Finance and Trade, 59(1), 60–77. https://doi.org/10.1080/1540496X.2022.2091434
Hasan, S. M., Tawfiq, T. T., Hasan, M., & Islam, K. M. A. (2024). Corporate governance dynamics in financial institution performance: A panel data analysis. Investment Management and Financial Innovations, 21(3), 292–303. https://doi.org/10.21511/imfi.21(3).2024.24
Ko, C., Lee, P., & Anandarajan, A. (2019). The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance. International Journal of Accounting & Information Management, 27(1), 96–110. https://doi.org/10.1108/IJAIM-05-2017-0070
Lidiawan, A. R., Djunaedi, Susilaningsih, N., & Cahyani, R. G. A. (2022). Loan To Deposit Ratio Assessment Of State-Owned Banks Based On Financial Ratios Penilaian Loan To Deposit Ratio Bank BUMN (Persero) Berdasarkan Rasio Keuangan. Management Studies and Entrepreneurship Journal, 3(6), 3709–3724. https://doi.org/10.37385/msej.v3i6.1201
Lin, J. S. B., & Liu, C. (2015). R&D, CG, firm size and firm valuation: evidence from Taiwanese companies. International Journal of Corporate Governance, 6(2/3/4), 87–97. https://doi.org/10.1504/IJCG.2015.074690
Mawutor, J. K. M., & Fred, A. (2015). Assessment of Efficiency and Profitability of Listed Banks in Ghana. Accounting and Finance Research, 4(1). https://doi.org/10.5430/afr.v4n1p164
Million, G., Matewos, K., & Sujata, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African Journal of Business Management, 9(2), 59–66. https://doi.org/10.5897/ajbm2013.7171
Mohammad, R., Nour, A. I., & Al-Atoot, S. M. (2024). Risk and reward: unraveling the link between credit risk, governance and financial performance in banking industry. Journal of Islamic Marketing. https://doi.org/10.1108/JIMA-11-2023-0378
Ngatno, Apriatni, E. P., & Youlianto, A. (2021). Moderating effects of corporate governance mechanism on the relation between capital structure and firm performance. Cogent Business and Management, 8(1). https://doi.org/10.1080/23311975.2020.1866822
Nour, A., Alia, M. A., & Balout, M. (2022). The Impact of Corporate Social Responsibility Disclosure on the Financial Performance of Banks Listed on the PEX and the ASE. In A. M. A. Musleh Al-Sartawi (Ed.), Artificial Intelligence for Sustainable Finance and Sustainable Technology. Lecture Notes in Networks and Systems (ICGER 2021, Vol. 238, pp. 42–54). https://doi.org/10.1007/978-3-030-93464-4_5
Nurbaiti Pertiwi, S., Henry Wicaksono, I., Setyo Lestari, H., & Margaretha Leon, F. (2023). THE EFFECT OF DIGITIZATION TRANSFORMATION ON FINANCIAL PERFORMANCE: A CASE STUDY OF BANKING COMPANIES IN INDONESIA. Journal Research of Social Science, Economics, and Management, 03(03), 620–635. https://doi.org/10.59141/jrssem.v3i03.547
Nurtrontong, P., Rahayu, S. M., & Handayani, S. R. (2021). HOW CORPORATE GOVERNANCE, CREDIT RISK AND PERFORMANCE LINK TOGETHER? The International Journal of Accounting and Business Society, 29(3).
Opoku, R. T., Angmor, P. L., & Boadi, L. A. (2016). Credit Risk and Bank Profitability: Evidence from Ghana Stock Exchange. Journal for Studies in Management and Planning, 2(3), 89–96. https://www.researchgate.net/publication/321005946
Palaniappan, G. (2017). Determinants of corporate financial performance relating to board characteristics of corporate governance in Indian manufacturing industry. European Journal of Management and Business Economics, 26(1), 67–85. https://doi.org/10.1108/EJMBE-07-2017-005
Pareek, R., Sahu, T. N., & Gupta, A. (2023). Gender diversity and corporate sustainability performance: empirical evidence from India. Vilakshan - XIMB Journal of Management, 20(1), 140–153. https://doi.org/10.1108/xjm-10-2020-0183
Singh, S. K., Basuki, B., & Setiawan, R. (2021). The Effect of Non-Performing Loan on Profitability: Empirical Evidence from Nepalese Commercial Banks. Journal of Asian Finance, Economics and Business, 8(4), 709–716. https://doi.org/10.13106/jafeb.2021.vol8.no4.0709
Sochib, Setyo Liyundira, F., & Yulianti, A. (2023). The Influence of LDR, NPL and ROA on PBV of Conventional National Commercial Bank’s in Indonesia. Progress Conference, 6(1). http://proceedings.itbwigalumajang.ac.id/index.php/progress
S&P Global Ratings. (2023). Supranationals. Available from: Https:// Www.Spglobal.Com/Ratings/En/Sector/Governments/Supranationals. https:// www.spglobal.com/ratings/en/sector/governments/supranationals
Srouji, A. F., Hamdallah, M. E., Al-Hamadeen, R., Al-Okaily, M., & Elamer, A. A. (2023). The impact of green innovation on sustainability and financial performance: Evidence from the Jordanian financial sector. Business Strategy and Development, 6(4), 1037–1052. https://doi.org/10.1002/bsd2.296
Vellati, D., & Oktaviani, M. (2024). Pengaruh Return On Asset, Public Ownership, dan Loan To Deposit Ratio Terhadap Tobin’s Q Pada Perusahaan Perbankan BUMN. Improvement: Jurnal Manajemen Dan Bisnis, 4(1), 86–98. www.idx.co.id
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