Determinants of Bank Business Risk According to Risk Based Approach

Abstract

finance the external process because Indonesia is using banking system [3]. The company debt will possibly make them facing financial distress. In other words, real factors are fragile against the performance of the banking industry. The high dependence of Indonesia citizens towards banking services in Indonesia is reaching 77.9%. Compared to the other financial institutions, rural banks is 1.3%, Insurance Company is 10.8%, Pension Fund is 2.8%, Corporate Financing is 6.8% and the other non-bank institutions is (0.9%) [4]. Based on the fact, people in Indonesia still prefer to banking sector rather than the other capital market activity. Accordingly, the banking industry is required having good corporate governance to keep the credibility that supports to economic stability. In response to the trustworthiness from society in Indonesia, 80% 90% fund that bank has compiled are from third party fund. The source of bank funding is from third party fund obtained through banking products such as from saving deposit, demand deposit and time deposit. In 2013, the percentage amount of third party fund is 89.62%, dominated by demand deposit and time deposit [6]. The higher reliance from banking customers on third party fund proportion would increase the risks for bank management to carry out the social fund. To keep the society trustworthiness, a prudent principle must be implemented in the banking industry because it relates to the business sustainability. The banking industry in Indonesia has grown significantly, characterized by a number of banks and banking offices. The growing industry in banking sectors in Indonesia was an impact of Package of Bank Indonesia Deregulation on October 27, 1988 which is known as Pakto 88 [7]. The aims of the reforms were to inject a greater level of competition into banking sector and to increase credit availability throughout the country [8]. Pakto 88 had triggered the banking liberalization in Indonesia. Banking liberalization eased the restriction of bank establishment, consequently a year after this term applied, the number of banks and offices were growing significantly. The high level of rapid competition in banking industry would lead the banks to take an excessive risk because of the difficulty to predict the phenomenon in a rapid competition [9]. Bank is a financial institution that manages money to be the main object of its operations. Because of that, bank has Abstract—Banks have important role on the economy of Indonesia. With a fully regulated principle, Banking Sectors in Indonesia concern to keep in a good performance according to Bank Indonesia Regulation No. 13 / 1 / PBI / 2011 which emphasize on risk-based approach. Therefore, this paper aims to examine the factors affecting commercial banks business risk listed on Indonesia Stock Exchange. Those factors consist of risk profile (credit risk, liquidity risk, and interest rate risk), good corporate governance, earnings, and capital. The samples used in this research are 26 commercial banks listed on Indonesia Stock Exchange during research period since 2011 to 2013. This research uses multiple linear regression analysis. The result of the findings shows that credit risk has effect against business risk, while liquidity risk does not have effect against it. The rate of interest risk has effect against business risk. Good corporate governance does not have effect against business risk. Earnings have significant effect against business risk. Capital does not have effect against business risk. Hence, the implication of the research is that commercial banks business risk is affected by three factors of risk-based bank rating (credit risk, interest rate risk, and earnings).