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DOI https://doi.org/10.18551/rjoas.2018-06.25
ANALYSIS OF LIQUIDITY RISK EFFECT TOWARD PROFITABILITY OF STATE OWNED AND FOREIGN EXCHANGE NATIONAL PRIVATE COMMERCIAL
BANKS IN INDONESIA
Paramitha Tri Yanti Endah*, Irawan Tony, Maulana Tb. Nur Ahmad
School of Business, Bogor Agricultural University, Indonesia *E-mail: thata.triyanti@gmail.com
ABSTRACT
This research aims to analyze liquidity risk effect toward profitability of State Owned and Foreign Exchange National Private Commercial Banks in Indonesia. The indicators of liquidity risk used in this research include loan to deposit ratio, liquidity gap and non-performing loan. In addition, the profitability used is return on assets. The samples used in this research are State Owned and Foreign Exchange National Private Commercial Banks. The data used in this research were obtained from the financial statements of each company on 2010-2016 periods. After passing through the purposive sample stage, the appropriate samples included 4 State Owned Banks and 8 Foreign Exchange National Private Commercial Banks. The analysis method used in this research is multiple regression analysis using E-views software 9. The findings showed that the loan to deposit ratio variable does not affect the profitability of State Owned Banks but has a positive and significant effect toward profitability of Foreign Exchange National Private Commercial Banks. In addition, liquidity gap variables have negative and significant effect on the profitability of State Owned and Foreign Exchange National Private. Non-performing loan variables also have negative and significant effect on the profitability of State Owned and Foreign Exchange National Private.
KEY WORDS
Liquidity risk, loan to deposit ratio, liquidity gap, non-performing loan, profitability of bank.
The banking system has an important role for economic development in various countries including Indonesia. Bank is a financial institution that serves to receive customer funds and channel the funds back to the interests of the community. The Bank also serves as an institution that organizes and provides financial services and traffic of payment services. Therefore, banks should be able to maintain their performance in order to become a healthy industry (Attar et al 2014). Company performance can be seen from the results of its profitability level. Profitability describes the company's ability to generate profits (Kartika and Hatane 2013). Companies that can generate large profits can attract investors to make investment in the company. Good profitability is a reward for the investors on the investments that they have been planted (Ongore and Kusa 2013). Profits generated by banks in recent years vary widely. The Bank with the largest profit is the State Owned and Foreign Exchange National Private Commercial Banks. The data of bank profitability development which is categorized based on the ownership in Indonesia from 2012 2016 can be seen in Table 1 below.
Table 1 - Bank Profitability in Indonesia in 2012 - 2016 (in Billion Rupiah)
2012 2013 2014 2015 2016
State Owned Bank 3.402 4.066 4.531 4.655 4.343
Foreign Exchange Commercial Bank 2.641 2.789 2.738 2.427 2.599
Non-Foreign Exchange Commercial Bank 233 257 193 174 15
Regional Development Bank 746 894 806 883 957
Joint Venture Bank 287 378 352 149 263
Foreign Owned Bank 428 510 727 431 702
Source: Indonesia Banking Statistics (processed).
Distributing public funds in the form of credit, banks will face risks and one of them is liquidity risk. Liquidity risk is a risk caused by liquidity uncertainty. Liquidity risk has become a serious concern and challenge for the Bank in the modern era (Anam 2013). Low quality asset and liquidity are the main causes of bank failures, which start with liquidity risk. It drew the attention of researchers to examine its effect toward bank profitability (Almazari 2014). The bank's ability to manage its liquidity will have an impact on the community's trust to the bank itself, which will help the operational continuity and existence of the bank (Prasetyo and Darmayanti 2015). Indicators of liquidity risk include loan to deposit ratio (LDR), liquidity gap and non-performing loan (NPL).
This study aims to examine the effect of liquidity risk toward bank profitability in Indonesia. Similar researches have been conducted in many countries including Indonesia. However, this study differs from previous research, where the sample used is State Owned and Foreign Exchange National Private Commercial Banks with the period of observation for seven years in 2010-2017.
LITERATURE REVIEW
Banks have an important role to the economy of a country. Based on the Law no. 10 of 1998 concerning banking, what is meant by a Bank is "a business entity that collects funds from the public in the form of savings and distributes it back to the community in the form of credit and/or other forms in order to improve the standard of living of the people". Kasmir (2016) revealed that banks can be interpreted as a financial institution whose main activity is to raise public funds and channel the funds back into the community and provide other bank services. The functions of commercial banks showing the importance of the existence of commercial banks in the modern economy include: (1) money creation, (2) support for the smoothness of payment mechanisms, (3) fund raising, (4) support for the smoothness of international transactions, (5) storing goods and securities, and (6) provision of other services (Manurung and Rahardja, 2004).
Gitman and Zutter (2012) revealed that profitability is a company's ability to generate profits derived from sales, assets, and owner investment. Profitability of the company is one way to judge precisely how far the rate of returns derived from investment activities (Arilaha, 2009). Profitability can be measured by one of the financial ratios namely return on (ROA). ROA measures the effectiveness of management in generating profits using the assets they own (Gitman and Zutter, 2012). The greater the ROA then it indicates the better the bank management in using the asset to generate profit; then the better the performance of the bank (Taswan, 2010).
Liquidity risk is a ratio to measure the risk that the bank will face if it fails to meet its obligations to depositors with liquid assets they own (Kasmir, 2016). Arif and Anees (2012) argued that these risks can affect bank capital and income. Ardianto et al. (2016) mentioned that liquidity risk may be due to the bank being unable to generate cash flows from productive assets, or deriving from the sale of assets including liquid assets, or from the collection of public funds, interbank transactions or the received borrowings. A bank is considered to be liquid if the bank can pay all its debts, especially short-term debt.
LDR states how far the ability of banks to repay the withdrawal of funds made by depositors by relying on loans given as liquidity (Rosyidah, 2012). A good LDR achievement is when the LDR is within the limits set by Bank Indonesia (Eng, 2013). Bank Indonesia shall set an LDR limit of 78% -100% mentioned in Bank Indonesia Regulation no. 12/19/PBI/2010 which is amended by Bank Indonesia Regulation no. 15/15/PBI/2013 with an LDR limit of 78%-92%. Sulistyowati (2016) argues that the higher the LDR level, it shows the increasingly risky condition of bank liquidity. Conversely, the lower the LDR level, it indicates a lack of bank effectiveness in distributing its credits.
According to Arif and Anees (2012), one of the main causes of liquidity risk is the maturity mismatch between assets and liabilities. Liquidity gap is a net liquid asset of a company which is derived from the difference in the value of liquid assets and the value of the company's liquidity (Culp, 2008). In the banking business, most of the assets are funded
by deposits that are likely to be cashed at any time (Anam, 2013). Culp (2008) proposed the main function of liquidity gap as a benchmark of static assessment of liquidity risk. Positive gap occurs when the asset position is greater than the liability in the maturity period. A company with a large negative gap should focus on the possibility of unexpected changes in the value of the cash balance. Liquidity gap can be seen from the maturity table of assets and liabilities of a bank (Arif and Anees, 2012).
The main functions of the bank include providing credit to customers in order to improve the standard of living of the people. The main reception of the banking industry is prioritized and expected coming from credit disbursement. The problem with common credit activities is the inability of customers to perform their obligations to lenders (Prasetyo and Darmayanti, 2015). The NPL shows that banks that are not professionals in their credit management will get an impact on the bank's losses (Septiani and Lestari, 2016). According to BI Regulation no. 17/11/PBI/2015, the best standard of NPL is below 5% and higher NPL resulted in decreasing bank performance.
METHODS OF RESEARCH
The type of data used in this research is secondary data in the form of panel data. The samples used are State Owned and Foreign Exchange National Private Commercial Banks in Indonesia during 2010-2016 periods. The financial data used in this research were obtained from the financial statements of each bank. Based on the data collection criteria, a total of 12 samples were obtained which included 4 State Owned Banks and 8 Foreign Exchange National Private Commercial Banks. Furthermore, the 12 banks are multiplied by the year of observation (seven years), resulting in 28 observations of the State Owned Bank and 56 observations of Foreign Exchange National Private Commercial Bank. The following is the measurement variable used in this research.
Table 2 - Measurement Variable
Dependent Variable
Return on Asset : Net income / Total assets
Independent Variables
Loan to Deposit Ratio : Total loan / Total Deposits
Liquidity Gap : (Total assets - Total liabilities) - (Fixed assets - Equity)
Non-performing Loan : NPL's rate
CONCEPTUAL FRAMEWORK
This research aims to analyze the effect of liquidity risk on the profitability of State Owned and Foreign Exchange National Private Commercial Banks in Indonesia. The things that are assumed as indicators of liquidity risk, which have influence on the profitability of State Owned and Foreign Exchange National Private Commercial Banks in Indonesia, are LDR, liquidity gap and NPL. Profitability is an end goal of the company's performance including the company within the banking sector. Thus, the conceptual framework of this research is as follows.
Figure 1 - Conceptual Framework of the Research
Based on the conceptual framework above, the proposed research hypotheses are: H1: Loan to Deposit Ratio (LDR) has a positive and significant effect on bank's profitability;
H2: Liquidity gap has a negative and significant effect on bank's profitability; H3: Non-performing Loan (NPL) has a negative and significant effect on bank's profitability.
RESULTS AND DISCUSSION
Before performing multiple regression analysis, several tests were conducted including: Chow Test:
Table 3 - Calculation Result of Chow Test
Chi-Square Statistic Prob.
State Owned Bank 42.025313 0.0000
Foreign Exchange Commercial Bank 58.396051 0.0000
Based on chow test at State Owned Bank and Foreign Exchange National Private Commercial Bank shows that the probability value of cross-section Chi-square is 0.0000 < 0.05 then H0 is rejected. Thus, the model to be used is fixed effect model. Hausman Test:
Table 4 - Calculation Result of Hausman Test
Chi-Square Statistic Prob.
State Owned Bank 73.200594 0.0000
Foreign Exchange Commercial Bank 14.490818 0.0000
Based on hausman test at State Owned Bank, it shows that the probability value of cross-section Chi-square is 0.0000 < 0.05, while for Foreign Exchange National Private Commercial Bank, the probability value of cross-section Chi-square is 0.0023 < 0.05 then H0 is rejected. Thus, the model to be used is fixed effect model. F-Test:
Table 5 - Calculation Result of F-Test
Prob. (F-Statistic) Conclusions
State Owned Bank 0.0000 Ha accepted
Foreign Exchange Commercial Bank 0.0000 Ha accepted
The result of data processing shows that the independent variables (LDR, liquidity gap and NPL) are known to have probability F of 0.000000 < 0.05 at State Owned and Foreign Exchange National Private Commercial Banks. It means that this regression model can be used to measure the relationship between LDR, liquidity gap and NPL toward profitability. Goodness of Fit Test (Adjusted R2):
Table 6 - Calculation Result of Adjusted R2
Adjusted R2
State Owned Bank 0.936297
Foreign Exchange Commercial Bank 0.785311
Based on the result of data processing using fixed effect model, it is known that the coefficient of double determination (Adjusted R2) at State Owned Bank is 0.936297. It shows the variation or behaviour of independent variable namely LDR, liquidity gap and NPL, is able to explain variation of dependent variable namely profitability that is equal to 93.6297%. Meanwhile, the remaining 6.3703% is a variation of other independent variables that affect profitability.
Based on the result of data processing using fixed effect model, it is known that the coefficient of double determination (Adjusted R2) at Foreign Exchange National Private Commercial Bank is 0.785311. It shows the variation or behaviour of independent variable namely LDR, liquidity gap and NPL, is able to explain variation of dependent variable namely profitability that is equal to 78.5311%. Meanwhile, the remaining 21.4689% is a variation of other independent variables that affect profitability. t-Test:
Table 3 - The Calculation Result
Variable State Owned Bank Foreign Exchange Commercial Bank
Constant 11.59852 14.66634
LDR 0.001244 0.032185**
Liquidity Gap -0.265779* -0.509393**
NPL -0.392841*** -0.361732***
Note: * significant at 10% level, ** significant at 5% level, *** significant at 1% level.
Based on the findings, LDR has no significant effect toward profitability of State Owned Bank. It can be seen from the P-value of LDR variable which is equal to 0.8996 with coefficient of 0.001244. However, LDR has a positive and significant effect toward Foreign Exchange National Private Commercial Bank with P-Value and coefficient of 0.0019 and 0.032185. Thus, if the LDR rises 1% then profitability will increase by 0.032185% in Foreign Exchange National Private Commercial Bank with the assumption of ceteris paribus. The effect of LDR toward profitability shows the higher LDR of a bank. Thus, the bank will be able to increase the distribution of funds to the customers. Thus, the bank will earn higher interest income and will increase bank profitability. Conversely, if the bank decreases LDR, bank profitability will also decrease. It is in line with the research conducted by Eng (2013) which reveals that LDR has a positive effect on bank profitability. The absence of LDR effect toward the profitability of State Owned Bank is likely due to the large asset ownership of State Owned Bank (Bilian and Purwanto, 2017). It is evidenced by the size of the State Owned Bank in 2010-2016 which was much higher than Foreign Exchange National Private Commercial Bank. In addition, as the NPL increased, it was followed by a decrease in credit growth rates occurring in Bank Rakyat Indonesia and Bank Tabungan Negara in 2014-2016. It is in line with the research conducted by Bilian and Purwanto (2017) which reveal that the LDR does not affect the profitability of State Owned Bank.
Based on the findings, liquidity gap has negative and significant toward profitability of State Owned and Foreign Exchange National Private Commercial Banks. It can be seen from the P-value of liquidity gap variable which is equal to 0.0823 with coefficient of 0.265779 for State Owned Bank. P-Value of liquidity gap variable is 0.0049 with coefficient of -0.509393 for Foreign Exchange National Private Commercial Bank. Thus, if liquidity gap increases 1%, it will decrease profitability by 0.265779% in State Owned Bank and 0.509393% in Foreign Exchange National Private Commercial Bank with the assumption of ceteris paribus. In the banking industry, most assets are funded by deposits that allow to be cashed at any time (Arif and Anees, 2012). This will result in a mismatch between assets and liabilities. The greater the mismatch between assets and liabilities, the liquidity gap will arise greater (Ramadanti and Meiranto, 2015). Liquidity gap will affect liquidity risk. Thus, greater the liquidity gap will be able to lower bank profitability. The findings of this research are in line with the research conducted by Arif and Anees (2012) and Anam (2013).
Based on the findings, NPL has negative and significant toward profitability of State Owned and Foreign Exchange National Private Commercial Banks. It can be seen from the P-value of NPL variable from the entire group of the bank which is equal to 0.0000 with each coefficient of -0.392841 for State Owned Bank and -0.361732 Foreign Exchange National Private Commercial Bank. Thus, if NPL increases 1%, it will decrease profitability by 0.392841% in State Owned Bank and 0.361732% in Foreign Exchange National Private Commercial Bank with the assumption of ceteris paribus. The higher NPL will worsen the quality of bank loans, which means that the number of non-performing loans is growing.
Thus, it allows a bank to be in an increasingly troubled condition (Eng, 2013). The higher NPL level will result in lower interest income received by the bank so that the bank cannot pay the obligations to the depositor. It certainly can reduce the level of bank profitability. The findings of this research are in line with research conducted by Arif and Anees (2012) and Anam (2013).
MANAGERIAL IMPLICATIONS
For banking industry companies, in an effort to improve bank profitability, it should consider liquidity risk indicators that include LDR, liquidity gap and NPL. For State Owned Bank, it is expected to pay more attention to the level of NPL then followed by liquidity gap. For Foreign Exchange National Private Commercial Bank, it is expected to pay attention to NPL level then followed by LDR and liquidity gap.
For investors who want to make investment in State Owned Bank, they do not have to worry about LDR. Seeing the NPL and liquidity gap only is enough. Meanwhile, if investors want to invest in Foreign Exchange National Private Commercial Bank, the investors are expected to pay attention to NPL, LDR and liquidity gap.
CONCLUSION
Based on the findings and discussion of research on the effect of liquidity risk including LDR, liquidity gap and NPL toward the profitability of State Owned and Foreign Exchange National Private Commercial Banks in Indonesia, it is concluded that LDR variable has no significant effect on profitability of State Owned Bank but has positive and significant effect toward the profitability of Foreign Exchange National Private Commercial Bank. The findings of the liquidity gap variable estimation show that the liquidity gap has negative and significant effect to the State Owned and Foreign Exchange National Private Commercial Banks. The result of the NPL variable estimation shows that the NPL has a negative and significant effect toward the profitability of State Owned and Foreign Exchange National Private Commercial Banks. Overall, from both groups of banks, the most liquidity risk indicator affecting bank profitability is NPL. In addition to NPL variables, liquidity risk indicators that affect bank profitability are liquidity gap and LDR. Based on the findings, it can be concluded that liquidity risk affects bank profitability.
SUGGESTIONS
Suggestions that can be submitted in this study concerning the effect of liquidity risk on the profitability of State Owned and Foreign Exchange National Private Commercial Banks for related parties include: the banking industry should pay attention to indicators of liquidity risk as it may affect bank profitability. Liquidity risk is one of the risks that most affect bank profitability. Liquidity risk can be seen by investors through these three indicators. Thus, if these three indicators are valued well by investors, it will affect the investment made by the investor which leads to the effect of profitability that will likely increase. Investors may use the methods in this research as a tool of information and indications in making investment decisions. Investors are expected to pay attention to the liquidity risk indicators before making the investment to prevent losses in their investments. For further researchers are expected to do the development of this research. It is by adding other variables or conducting research from other risk variable within the banking industry which can be developed further from this research.
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