Assets Quality and Capital as Risk and Profitability Determinants in Banking Industry

Abstract

: Assets quality and capital in Indonesian banking industry have increased every year. However, this increase is not accompanied by an increase in profitability. Although the determinant of unstable profitability is not easy to predict, the quality of assets and capital are two important components in the ongoing business of banks to deal with credit risk and to increase profitability, both in conventional and Islamic banks. This study was conducted to determine whether assets quality and capital have an effect on credit risk and profitability in both conventional and Islamic banks in Indonesia. The population of this study was 115 banks in Indonesia. The research used purposive sampling technique and obtained 39 banks as samples, consisting of 29 conventional banks and 10 Islamic banks. The data were analyzed using path analysis technique. The results show that assets quality has a positive and significant effect on credit risk in both conventional and Islamic banks. On the other hand, capital has no effect on credit risk in both types of banks. Assets quality has a positive and significant effect on profitability in conventional banks, but has a negative effect on Islamic banks. Capital has a positive and significant effect on profitability in conventional banks. Meanwhile, credit risk has a negative and significant effect on profitability in both banks.