Academic journal article Researchers World

Determinants of Internal and External Factor on Commercial Bank in Indonesia

Academic journal article Researchers World

Determinants of Internal and External Factor on Commercial Bank in Indonesia

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION:

Bank is prime mover in the economy of a country. According to UU no.10 Tahun 1998, bank is an entity that collects funds from public in the form of savings, and distributes it to public in the form of credit and/or other forms in order to improve the standard of living of the people (Kasmir, 2012). According to (Dilley, 2008), bank is an establishment for custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.

In economic system, bank serves as an intermediary institution. According to (Matthews & Thompson, 2005), financial intermediation is a process that involves surplus units depositing funds with financial institutions that in turn lend to deficit units. The intermediary function involves who have excess of funds which subsequently distributed to parties who are lack fund.

The role of banks, as mentioned above is a very important part to find out the fund sources that exist in society and distribute fund to productive business. With these functions, bank expected to optimize bank performance to the attainment of financial performance as expected. Therefore, it can push economic activity to make it more effective. Based on Bloomberg data in 2013, the average growth of ROA Indonesia banking industry was 2.5%. ROA growth in the United States is 1.6% and 1.33% for Asia Pacific. The lowest ROA value is in Europe by 1%. (www.jpnn.com).

However, based on financial statements issued by BEI in 2012-2014, the average ROA of commercial banks decreased. In 2012 the average ROA of commercial banks was 1.39%. However, in 2013, the average ROA of Commercial Bank became 0.98%. In 2014, the average ROA of Commercial Bank was 0.685%, while government-owned Bank showed different results. In 2012 the government-owned Bank's ROA average was 1.85% and in 2013 was 1.9%. It decreased into 1.76% in 2014.

Return On Assets is an ability of the capital invested in the entire assets of the company to generate a profit. The higher the profit generated, the higher the ROA, it means that the company is more effective in using assets to generate profits (Hamdi, 2015). Thus, in this study, ROA is used as a measure of bank performance. Return on Asset (ROA) is used to measure the effectiveness of a company in generating profits by exploiting its assets.

Inflation studied by (Frederick, 2014) showed a positive effect. Inflation has positive effect because banks are able to predict inflation precisely that it can gain more profits. (Ongore & Kusa, 2013) in his research showed that inflation has negative effect on ROA. Meanwhile, according (Ameur & dan Mhiri, 2013)inflation does not affect ROA. (Wibowo & Syaichu, 2013) in their research suggested that inflation has negative influence and insignificant. In his research, (Hamdi & Lestari, 2015)stated that GDP negatively affect ROA. When national income increases, the amount of consumption and saving will increase. Therefore, people do not need additional funds for consumption because it can be fulfilled with their own income. Thus there is no demand for money in the society. If there is no demand for money from the society, the number of loans to distribute will decrease. The decrease of credit will have an impact on the decline in bank interest income. (Zeitun, 2012) showed that GDP positively affects ROA. According (Obamuyi, 2013)high GDP demonstrates high profitable business opportunities in which banks can achieve high financial performance. This is because the increase in economic activity will signal a state that demand for credit will increase, and with the increase in lending activity, banks can generate more profit. (Ameur & dan Mhiri, 2013) observed that GDP is not significantly affects to ROA. (Rini & Sufian, 2013) stated that the size of bank may affect bank's ability to generate profits. Banks that are large are generally able to generate greater profits than the banks are small. …

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