Bank Competition, Credit Risk, and Foreign Bank Penetration: Empirical Evidence from Indonesia
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Published:
Apr 30, 2022
Keywords:
bank competition, credit risk, foreign bank penetration, competition-fragility, lerner index
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Abstract
This study examines the relationship between bank competition and credit risk with foreign bank penetration as a moderating variable. The research sample used was 79 commercial banks listed in the Indonesian Banking Directory published by the Financial Services Authority (OJK) during the 2014-2019 period with a total of 474 observations. The results of this study indicate that the higher the bank's competition, the higher the bank's credit risk, which is in accordance with the competition-fragility theory. Furthermore, from the results of the Moderated Regression Analysis, the results show that foreign bank penetration has not been able to moderate the relationship between bank competition and bank credit risk, however, if it stands as an independent variable on its own, foreign bank penetration will reduce bank credit risk. The results of this study contribute to providing useful information for parties in the banking industry that increasing foreign bank penetration can reduce bank credit risk.
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Copyright (c) 2022 Olivia Nuralyza, Niluh Putu Dian Rosalina Handayani Narsa, Dewi Sriani
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References
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Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank competition and financial stability. Journal of Financial Services Research, 35(2), 99–118. https://doi.org/10.1007/s10693-008-0050-7
Boyd, J. H., & De Nicolo, G. (2005). The theory of bank risk taking and competition revisited. The Journal of finance, 60(3), 1329–1343.
Brei, M., Jacolin, L., & Noah, A. (2020). Credit risk and bank competition in Sub-Saharan Africa. Emerging Markets Review, 100716. https://doi.org/10.1016/j.ememar.2020.100716
Cao, A. Y., Chou, J., Gregory-smith, I., Montagnoli, A., Cao, Y., Chou, J., & Gregory-smith, I. (2020). Bank Competition and Financial Stability : Evidence from the U . S . Banking Deregulation Bank Competition and Financial Stability : Evidence from the U . S . Banking Deregulation ∗. 2020003.
Chen, J., & Zhu, L. (2019). Foreign penetration, competition, and financial freedom: Evidence from the banking industries in emerging markets. Journal of Economics and Business, 102, 26–38. https://doi.org/10.1016/j.jeconbus.2018.10.003
Chen, Nazir, Hashmi, & Shaikh. (2019). Bank Competition, Foreign Bank Entry, and Risk-Taking Behavior: Cross Country Evidence. Journal of Risk and Financial Management, 12(3), 106. https://doi.org/10.3390/jrfm12030106
Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign entry affect domestic banking markets? Journal of Banking & Finance, 25(5), 891–911.
Claessens, S., & Horen, N. van. (2012). Foreign Banks: Trends, Impact and Financial Stability; by Stijn Claessens and Neeltje van Horen; IMF Working Paper 12/10; January 1, 2012. Imf Working Paper, 10, 1–36.
Clark, E., Radić, N., & Sharipova, A. (2018). Bank competition and stability in the CIS markets. Journal of International Financial Markets, Institutions and Money, 54, 190–203. https://doi.org/10.1016/j.intfin.2017.12.005
Deak, N. L. (1984). International banking / Nicholas L. Deak, JoAnne Celusak (J. Celusak (ed.)). New York Institute of Finance.
Diallo, B. (2015). Bank competition and crises revisited: New results. Economics Letters, 129, 81–86. https://doi.org/10.1016/j.econlet.2015.02.015
Detragiache, E., Tressel, T., & Gupta, P. (2008). Foreign banks in poor countries: theory and evidence. The Journal of Finance, 63(5), 2123–2160.
Dushku, E. (2016). Bank Risk-Taking and Competition in the Albanian Banking Sector. South-Eastern Europe Journal of Economics, 14(2), 187–203.
Dwumfour, R. A. (2017). Explaining banking stability in Sub-Saharan Africa. Research in International Business and Finance, 41, 260–279. https://doi.org/10.1016/j.ribaf.2017.04.027
Fernandez de Guevara, J., Maudos, J., & Perez, F. (2005). Market Power in European Banking Sectors. Journal of Financial Services Research, 27(2).
Frederick, O. (2012). The Effect of Credit Risk Management on the Financial Performance of Commercial Banks in Kenya. DBA Africa Management Review, 1(1), 45–47. https://doi.org/10.5897/AJBM2013.7171
Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238–248. https://doi.org/10.1016/j.bir.2017.05.002
González, L. O., Razia, A., Búa, M. V., & Sestayo, R. L. (2017). Competition, concentration and risk taking in Banking sector of MENA countries. Research in International Business and Finance, 42, 591–604.
Hawtrey, K., & Liang, H. (2008). Bank interest margins in OECD countries. North American Journal of Economics and Finance, 19(3), 249–260. https://doi.org/10.1016/j.najef.2008.07.003
Jeon, B. N., Olivero, M. P., & Wu, J. (2011). Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets. Journal of Banking and Finance, 35(4), 856–875. https://doi.org/10.1016/j.jbankfin.2010.10.012
Kabir Hassan, M., Sanchez, B., & Faisal Safa, M. (2013). Impact of financial liberalization and foreign bank entry on Islamic banking performance. International Journal of Islamic and Middle Eastern Finance and Management, 6(1), 7–42. https://doi.org/10.1108/17538391311310716
Kamus, T. P. P. (2007). Dictionary of Bahasa Indonesia (KBBI). Balai Pustaka. Universitas Terbuka. Usaha Keluarga.
Keeley, M. C. (1990). Deposit Insurance, Risk, and Market Power in Banking. The American Economic Review, 80(5), 1183–1200. http://www.jstor.org/stable/2006769
Lee, C. C., Hsieh, M. F., & Yang, S. J. (2016). The effects of foreign ownership on competition in the banking industry: The key role of financial reforms. Japan and the World Economy, 37–38, 27–46. https://doi.org/10.1016/j.japwor.2016.02.002
Luo, D., Dong, Y., Armitage, S., & Hou, W. (2017). The impact of foreign bank penetration on the domestic banking sector: New evidence from China. European Journal of Finance, 23(7–9), 752–780. https://doi.org/10.1080/1351847X.2014.1003314
Martinez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure?Martinez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure? The Review of Financial Studies, 23(10), 3638–3664. The Review of Financial Studies, 23(10), 3638–3664.
Micco, A., Panizza, U., & Yañez, M. (2004). Bank Ownership and Performance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1818718
Mody, A., & Peria, M. S. M. (2004). How foreign participation and market concentration impact bank spreads: evidence from Latin America (Vol. 3210). World Bank Publications.
Muljaningsih, S., & Riska Dwi Wulandari. (2019). The effect of inflation, BI Rate, and Gross Domestic Product (GDP) to Non Performing Loan (NPL) ration in Indonesian Banking Institution. OECONOMICUS Journal Of Economics, 3(2), 1–27.
Natsir, M., Soedarmono, W., April Yudhi, W. S., Trinugroho, I., & Warokka, A. (2019). Foreign penetration, competition, and credit risk in banking. Borsa Istanbul Review, 19(3), 249–257. https://doi.org/10.1016/j.bir.2019.05.003
Pham, Q. V., & Nguyen, M. T. (2020). Possible Impact From Foreign Bank Presence To the Performance of Local Commercial Banks in Vietnam. International Journal of Economics and Financial Issues, 10(2), 216–221. https://doi.org/10.32479/ijefi.9297
Rahman, A., Tvaronaviciene, M., Smrcka, L., & Androniceanu, A. (2019). The effect of bank competition on the cost of credit: empirical evidence from the Visegrad countries. Acta Polytechnica Hungarica, 16(4), 175–195.
Ramadhanti, C., Marlina, M., & Hidayati, S. (2019). The Effect Capital Adequacy, Liquidity and Credit Risk to Profitability of Commercial Banks. Journal of Economics, Business, and Government Challenges, 2(1), 71–78. https://doi.org/10.33005/ebgc.v2i1.66
Richard, M. (2020, Desember 17). Morgan Stanley: Tren Merger dan Akuisisi Bank oleh Asing Bakal Lebih Marak. https://finansial.bisnis.com. https://finansial.bisnis.com/read/20200807/90/1276324/morgan-stanley-tren-merger-dan-akuisisi-bank-oleh-asing-bakal-lebih-marak
Sharma, S., Durand, R. M., & Gur-Arie, O. (1981). Identification and Analysis of Moderator Variables. Journal of Marketing Research, 18(3), 291. https://doi.org/10.2307/3150970
Sinha, P., & Sharma, S. (2016). Relationship of financial stability and risk with market structure and competition: evidence from Indian banking sector. University Library of Munich, Germany.
Soedarmono, W., & Tarazi, A. (2016). Competition, Financial Intermediation, and Riskiness of Banks: Evidence from the Asia-Pacific Region. Emerging Markets Finance and Trade, 52(4), 961–974. https://doi.org/10.1080/1540496X.2015.1018039
Syofyan, S., & Usman, B. (2014). Foreign Bank Penetration In Asean And It’s Impact Toward Banking Competition. OIDA International Journal of Sustainable Development, 9(12), 65–74.
Taşkın, F. D. (2019). The Impact of Financial Crisis on the Commercial Bank Net Interest Margins: Evidence from the Turkish Banking Industry. International Journal of Contemporary Economics and Administrative Sciences, 9(2), 428–442.
Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from developing countries. Journal of Banking and Finance, 34(4), 765–775. https://doi.org/10.1016/j.jbankfin.2009.09.004
Usman, B., Syofyan, S., Nugroho, L., & Soeharjoto. (2018). Foreign Bank Penetration and Its Impact on Banking Industries. Eurasian Journal of Economics and Finance, 6(1), 64–83. https://doi.org/10.15604/ejef.2018.06.01.007
Valipaour, P. M. (2014). Analysis of The Capital Adequacy Ratio and Nonperforming Loans Relationship in the Banking Network of Iran. Journal of MOney and Economy, 9(3): 59-83.
Vives, X. (2011). Competition policy in banking. Oxford Review of Economic Policy, 27(3), 479–497. http://www.jstor.org/stable/23607113
Wibowo, B. (2016). Stabilitas Bank, Tingkat Persaingan Antar Bank dan Diversifikasi Sumber Pendapatan: Analisis Per Kelompok Bank di Indonesia. Jurnal Manajemen Teknologi, 15(2), 172–195. https://doi.org/10.12695/jmt.2016.15.2.5
Wibowo, B., & Prasetyo Siantoro, A. (2018). Tingkat Persaingan Bank dan Risiko Sistemik Perbankan: Kasus Indonesia. Jurnal Manajemen Teknologi, 17(3), 166–179. https://doi.org/10.12695/jmt.2018.17.3.1
Wibowo, I. G. B., & Wibowo, B. (2016). The Effect of Competition Level and Banking Concentration to Systemic Risks: Indonesia Case. SSRN Electronic Journal, 1–25.
Wu, J., Chen, M., Jeon, B. N., & Wang, R. (2017). Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies. Journal of Financial Stability, 31, 45–61. https://doi.org/10.1016/j.jfs.2017.06.004
Yin, H. (2020). Foreign bank entry and bank competition: Cross-country heterogeneity. Global Finance Journal, April, 100558. https://doi.org/10.1016/j.gfj.2020.100558
Yulianti, E., Aliamin, A., & Ibrahim, R. (2018). The Effect of Capital Adequacy and Bank Size on Non-Performing Loans in Indonesian Public Banks. Journal of Accounting Research Organization and Economic, 1(2), 205-214.
Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank competition and financial stability. Journal of Financial Services Research, 35(2), 99–118. https://doi.org/10.1007/s10693-008-0050-7
Boyd, J. H., & De Nicolo, G. (2005). The theory of bank risk taking and competition revisited. The Journal of finance, 60(3), 1329–1343.
Brei, M., Jacolin, L., & Noah, A. (2020). Credit risk and bank competition in Sub-Saharan Africa. Emerging Markets Review, 100716. https://doi.org/10.1016/j.ememar.2020.100716
Cao, A. Y., Chou, J., Gregory-smith, I., Montagnoli, A., Cao, Y., Chou, J., & Gregory-smith, I. (2020). Bank Competition and Financial Stability : Evidence from the U . S . Banking Deregulation Bank Competition and Financial Stability : Evidence from the U . S . Banking Deregulation ∗. 2020003.
Chen, J., & Zhu, L. (2019). Foreign penetration, competition, and financial freedom: Evidence from the banking industries in emerging markets. Journal of Economics and Business, 102, 26–38. https://doi.org/10.1016/j.jeconbus.2018.10.003
Chen, Nazir, Hashmi, & Shaikh. (2019). Bank Competition, Foreign Bank Entry, and Risk-Taking Behavior: Cross Country Evidence. Journal of Risk and Financial Management, 12(3), 106. https://doi.org/10.3390/jrfm12030106
Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign entry affect domestic banking markets? Journal of Banking & Finance, 25(5), 891–911.
Claessens, S., & Horen, N. van. (2012). Foreign Banks: Trends, Impact and Financial Stability; by Stijn Claessens and Neeltje van Horen; IMF Working Paper 12/10; January 1, 2012. Imf Working Paper, 10, 1–36.
Clark, E., Radić, N., & Sharipova, A. (2018). Bank competition and stability in the CIS markets. Journal of International Financial Markets, Institutions and Money, 54, 190–203. https://doi.org/10.1016/j.intfin.2017.12.005
Deak, N. L. (1984). International banking / Nicholas L. Deak, JoAnne Celusak (J. Celusak (ed.)). New York Institute of Finance.
Diallo, B. (2015). Bank competition and crises revisited: New results. Economics Letters, 129, 81–86. https://doi.org/10.1016/j.econlet.2015.02.015
Detragiache, E., Tressel, T., & Gupta, P. (2008). Foreign banks in poor countries: theory and evidence. The Journal of Finance, 63(5), 2123–2160.
Dushku, E. (2016). Bank Risk-Taking and Competition in the Albanian Banking Sector. South-Eastern Europe Journal of Economics, 14(2), 187–203.
Dwumfour, R. A. (2017). Explaining banking stability in Sub-Saharan Africa. Research in International Business and Finance, 41, 260–279. https://doi.org/10.1016/j.ribaf.2017.04.027
Fernandez de Guevara, J., Maudos, J., & Perez, F. (2005). Market Power in European Banking Sectors. Journal of Financial Services Research, 27(2).
Frederick, O. (2012). The Effect of Credit Risk Management on the Financial Performance of Commercial Banks in Kenya. DBA Africa Management Review, 1(1), 45–47. https://doi.org/10.5897/AJBM2013.7171
Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238–248. https://doi.org/10.1016/j.bir.2017.05.002
González, L. O., Razia, A., Búa, M. V., & Sestayo, R. L. (2017). Competition, concentration and risk taking in Banking sector of MENA countries. Research in International Business and Finance, 42, 591–604.
Hawtrey, K., & Liang, H. (2008). Bank interest margins in OECD countries. North American Journal of Economics and Finance, 19(3), 249–260. https://doi.org/10.1016/j.najef.2008.07.003
Jeon, B. N., Olivero, M. P., & Wu, J. (2011). Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets. Journal of Banking and Finance, 35(4), 856–875. https://doi.org/10.1016/j.jbankfin.2010.10.012
Kabir Hassan, M., Sanchez, B., & Faisal Safa, M. (2013). Impact of financial liberalization and foreign bank entry on Islamic banking performance. International Journal of Islamic and Middle Eastern Finance and Management, 6(1), 7–42. https://doi.org/10.1108/17538391311310716
Kamus, T. P. P. (2007). Dictionary of Bahasa Indonesia (KBBI). Balai Pustaka. Universitas Terbuka. Usaha Keluarga.
Keeley, M. C. (1990). Deposit Insurance, Risk, and Market Power in Banking. The American Economic Review, 80(5), 1183–1200. http://www.jstor.org/stable/2006769
Lee, C. C., Hsieh, M. F., & Yang, S. J. (2016). The effects of foreign ownership on competition in the banking industry: The key role of financial reforms. Japan and the World Economy, 37–38, 27–46. https://doi.org/10.1016/j.japwor.2016.02.002
Luo, D., Dong, Y., Armitage, S., & Hou, W. (2017). The impact of foreign bank penetration on the domestic banking sector: New evidence from China. European Journal of Finance, 23(7–9), 752–780. https://doi.org/10.1080/1351847X.2014.1003314
Martinez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure?Martinez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure? The Review of Financial Studies, 23(10), 3638–3664. The Review of Financial Studies, 23(10), 3638–3664.
Micco, A., Panizza, U., & Yañez, M. (2004). Bank Ownership and Performance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1818718
Mody, A., & Peria, M. S. M. (2004). How foreign participation and market concentration impact bank spreads: evidence from Latin America (Vol. 3210). World Bank Publications.
Muljaningsih, S., & Riska Dwi Wulandari. (2019). The effect of inflation, BI Rate, and Gross Domestic Product (GDP) to Non Performing Loan (NPL) ration in Indonesian Banking Institution. OECONOMICUS Journal Of Economics, 3(2), 1–27.
Natsir, M., Soedarmono, W., April Yudhi, W. S., Trinugroho, I., & Warokka, A. (2019). Foreign penetration, competition, and credit risk in banking. Borsa Istanbul Review, 19(3), 249–257. https://doi.org/10.1016/j.bir.2019.05.003
Pham, Q. V., & Nguyen, M. T. (2020). Possible Impact From Foreign Bank Presence To the Performance of Local Commercial Banks in Vietnam. International Journal of Economics and Financial Issues, 10(2), 216–221. https://doi.org/10.32479/ijefi.9297
Rahman, A., Tvaronaviciene, M., Smrcka, L., & Androniceanu, A. (2019). The effect of bank competition on the cost of credit: empirical evidence from the Visegrad countries. Acta Polytechnica Hungarica, 16(4), 175–195.
Ramadhanti, C., Marlina, M., & Hidayati, S. (2019). The Effect Capital Adequacy, Liquidity and Credit Risk to Profitability of Commercial Banks. Journal of Economics, Business, and Government Challenges, 2(1), 71–78. https://doi.org/10.33005/ebgc.v2i1.66
Richard, M. (2020, Desember 17). Morgan Stanley: Tren Merger dan Akuisisi Bank oleh Asing Bakal Lebih Marak. https://finansial.bisnis.com. https://finansial.bisnis.com/read/20200807/90/1276324/morgan-stanley-tren-merger-dan-akuisisi-bank-oleh-asing-bakal-lebih-marak
Sharma, S., Durand, R. M., & Gur-Arie, O. (1981). Identification and Analysis of Moderator Variables. Journal of Marketing Research, 18(3), 291. https://doi.org/10.2307/3150970
Sinha, P., & Sharma, S. (2016). Relationship of financial stability and risk with market structure and competition: evidence from Indian banking sector. University Library of Munich, Germany.
Soedarmono, W., & Tarazi, A. (2016). Competition, Financial Intermediation, and Riskiness of Banks: Evidence from the Asia-Pacific Region. Emerging Markets Finance and Trade, 52(4), 961–974. https://doi.org/10.1080/1540496X.2015.1018039
Syofyan, S., & Usman, B. (2014). Foreign Bank Penetration In Asean And It’s Impact Toward Banking Competition. OIDA International Journal of Sustainable Development, 9(12), 65–74.
Taşkın, F. D. (2019). The Impact of Financial Crisis on the Commercial Bank Net Interest Margins: Evidence from the Turkish Banking Industry. International Journal of Contemporary Economics and Administrative Sciences, 9(2), 428–442.
Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from developing countries. Journal of Banking and Finance, 34(4), 765–775. https://doi.org/10.1016/j.jbankfin.2009.09.004
Usman, B., Syofyan, S., Nugroho, L., & Soeharjoto. (2018). Foreign Bank Penetration and Its Impact on Banking Industries. Eurasian Journal of Economics and Finance, 6(1), 64–83. https://doi.org/10.15604/ejef.2018.06.01.007
Valipaour, P. M. (2014). Analysis of The Capital Adequacy Ratio and Nonperforming Loans Relationship in the Banking Network of Iran. Journal of MOney and Economy, 9(3): 59-83.
Vives, X. (2011). Competition policy in banking. Oxford Review of Economic Policy, 27(3), 479–497. http://www.jstor.org/stable/23607113
Wibowo, B. (2016). Stabilitas Bank, Tingkat Persaingan Antar Bank dan Diversifikasi Sumber Pendapatan: Analisis Per Kelompok Bank di Indonesia. Jurnal Manajemen Teknologi, 15(2), 172–195. https://doi.org/10.12695/jmt.2016.15.2.5
Wibowo, B., & Prasetyo Siantoro, A. (2018). Tingkat Persaingan Bank dan Risiko Sistemik Perbankan: Kasus Indonesia. Jurnal Manajemen Teknologi, 17(3), 166–179. https://doi.org/10.12695/jmt.2018.17.3.1
Wibowo, I. G. B., & Wibowo, B. (2016). The Effect of Competition Level and Banking Concentration to Systemic Risks: Indonesia Case. SSRN Electronic Journal, 1–25.
Wu, J., Chen, M., Jeon, B. N., & Wang, R. (2017). Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies. Journal of Financial Stability, 31, 45–61. https://doi.org/10.1016/j.jfs.2017.06.004
Yin, H. (2020). Foreign bank entry and bank competition: Cross-country heterogeneity. Global Finance Journal, April, 100558. https://doi.org/10.1016/j.gfj.2020.100558
Yulianti, E., Aliamin, A., & Ibrahim, R. (2018). The Effect of Capital Adequacy and Bank Size on Non-Performing Loans in Indonesian Public Banks. Journal of Accounting Research Organization and Economic, 1(2), 205-214.