Bank Competition, Credit Risk, and Foreign Bank Penetration: Empirical Evidence from Indonesia

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.

The Response of Financial Performance to The Market Power of Islamic Banking in Indonesia

“…Market power will increase profitability of a firm but it can affect prices, which is contrary to the public welfare (Smirlock, 1985;Van Hoose, 2010;Christopher, et al 2020). Tight competition in the banking sector will increase access to lower-cost credit that can trigger the likelihood of corporate credits and increase the growth of the companies' assets (Nuralyza, et al 2022). The structure of Islamic banking in Indonesia can be stated as oligopoly and it is concentrated in the power of the large banks (Al Arif & Awwaliyah, 2019).…”