ANALYSIS OF THE EFFECTS OF FINANCIAL RISKS ON THE PROFITABILITY OF COMMERCIAL BANKS IN INDONESIA PERIOD 2012 – 2021

Abstract

In carrying out their business operations, commercial banks in Indonesia are exposed to various uncertainties that can pose as financial risks. Based on Indonesian Banking Statistics, non-performing loans have increased annually in Indonesian commercial banks from 2012 to 2021, which is only one source of risk. Additionally, fluctuations in external variables can result in uncertainties which cannot be controlled by the relevant institutions. In line with this problem, the following research is aimed at analyzing the relationship between internal risks (such as: credit, liquidity, and operational risk) along with external risks (such as: interest rate, inflation, and foreign exchange) with Indonesian commercial bank’s profitability in period 2012 to 2021. In this research, 10 commercial banks in Indonesia which categorized into BUKU 4 will be used as samples. Multiple linear regression and descriptive statistics were implemented in this study to obtain accurate hypothesis test results. This research established a result that in the period used, selected independent variables simultaneously have a significant relationship to the profitability of commercial banks. In addition, operational and liquidity risks are internal financial risk that were shown to have partial significant relationship. As for external risks, the result shows that the inflation rate has a partial significant relationship with the profitability of commercial banks.