فعالیت های با درآمد بدون بهره، ریسک بانک در صنعت بانکداری اندونزی

The recent trend of product diversification in the Indonesian banking industry underscores the importance of non-interest income activities. This study examines the relationship between product diversification and bank risk over the period of 2002–2008. Our analysis shows clear evidence that the effect of product diversification on bank risk depends highly on the bank's asset size. Specifically, the degree of product diversification is negatively associated with bank risk for small-sized banks. Conversely, the degree of product diversification is positively related to bank risk for large-sized banks. This finding suggests that deregulation encouraging banks to become more involved in non-traditional activities may have an adverse effect on the overall banking system where large-sized banks are playing a significant role in Indonesia.

Recent trends in the integrated world economy with intensified competition spurred on by financial deregulation in Indonesia have encouraged commercial banks to diversify the range of financial services they offer clients. Product diversification under this new environment tends to increase the share of non-interest income in profits. Non-interest income stems from traditional services, such as checking and cash management, as well as from new financial services, such as bank account management and investment banking. As the supervisory authority, one concern for Bank Indonesia is whether or not the prevalence of product diversification increases bank risk. This issue is crucial since high bank risk gives rise to banking system instability. Given this context, this study discusses the relationship between bank risk and product diversification by empirically examining a set of risk and insolvency measures based on accounting data at the individual bank level in Indonesia over the period of 2002–2008. The diversification of income toward non-traditional activities has been crucial in offsetting the decline in traditional income since the 1997 Asian financial crisis. At the same time, Bank Indonesia has also adopted a banking policy to encourage commercial banks to diversify their income toward non-traditional activities.3 Indeed, the fee-based income ratio is now an important bank profitability indicator for Bank Indonesia.4 To evaluate this banking policy, a more careful examination is required of the relationship between non-traditional activities and bank risk. If the prevalence of product diversification helps reduce bank risk, the banking policy will improve stability and the overall soundness of the banking system. Many studies, most focusing on the US banking industry, examine the relationship between product diversification and bank risk (see Kwan and Laderman, 1999 and Saunders and Walter, 1994, for a review). Kwast (1989), Santomero and Chung (1992), Templeton and Severiens (1992), Saunders and Walter (1994), and Gallo, Apilado, and Kolari (1996) show potential benefits of income diversification associated with the combination of US banking and non-banking activities. In contrast, studies such as Boyd and Graham, 1986 and Boyd and Graham, 1988, Sinkey and Nash (1993), Demsetz and Strahan (1997), Roland (1997), and Kwan (1998) are inconclusive or present partial evidence supporting the notion that product diversification with non-banking activities results in increasing US bank risk. In particular, De Young and Roland (2001), Stiroh (2004), and Stiroh and Rumble (2006) observe potential costs of product diversification by showing that non-interest income activities are positively related with earnings volatility in the US. This finding is due in part to a positive correlation between interest income and non-interest income. De Young and Roland (2001) also emphasize that product diversification may not reduce risk because of the relative instability of non-interest income, fixed costs associated with non-interest income activities, and large earnings fluctuations with a high degree of financial leverage associated with a lack of regulation. As for the relationship between product diversification and bank risk outside of the US, a study by Lepetit, Nys, Rous, and Tarazi (2008) on European banks for the period 1996–2002 finds that an expansion of their income into non-interest activities increased bank risk, mainly due to commission and fee activities rather than trading activities. For the Indonesian banking industry, a risk supervision approach is attractive to policymakers who desire a sound banking system, and there are several studies related to risk in the Indonesian banking system. For example, Santoso (1998) examines the determinants of problem banks in Indonesia. Zulverdi, Gunadi, and Pramono (2007) study banks’ behavior in portfolio selection and its impact on the effectiveness of monetary policy. However, to the best of our knowledge, no extensive study has examined how product diversification relates to bank risk in developing countries including Indonesia. Thus, this study is a first attempt to better understand this important issue in the Indonesian banking industry. Following the work of Lepetit et al. (2008) on the European banking industry, this study empirically investigates the relationship between non-interest income activities and bank risk by utilizing alternative ways to measure bank risks based on income structure over the period of 2002–2008. This analysis also examines how the relationship is associated with bank size. Since fixed costs associated with fee-based financial services may enable large-sized banks to take a more aggressive position on non-interest services than small-sized banks, bank size might influence a banks’ behavior in regards to non-interest income activities. In this study, to better understand the role of non-interest income activities, non-interest income is divided into two components: trading activities and commission and fee activities. Indonesian commercial bank annual report data is used and covers year-end balance sheets and income statements for 112 banks. The analysis shows that bank size is a crucial factor determining how non-interest income activities are associated with bank risk. More precisely, a higher reliance on non-interest income activities entails a lower level of bank risk for relatively small-sized banks but entails a higher level of bank risk for relatively large-sized banks. The large-sized bank observation is consistent with the results of Kwan (1998), De Young and Roland (2001), Stiroh (2004), and Lepetit et al. (2008) in that non-banking activities increased bank risk. Furthermore, our results of size-dependent responses of bank risk for small-sized banks are in contrast to those of Lepetit et al. (2008) in that the positive link between non-interest income and bank risk is more significant for small-sized banks in the European banking industry. The remainder of this paper is organized as follows: Section 2 introduces the empirical methodology and data with several measures of bank risks, including insolvency risk. Then the empirical results are presented and show the relationship between non-interest income activities and bank risk. In particular, we focus on how the relationship varies in response to the relative asset size of banks. Section 3 offers concluding remarks with several implications related to banking policy.

Financial stability, particularly after the Asian financial crisis, is a key issue for financial regulators, including central banks and also all financial institutions. To achieve financial stability, Bank Indonesia highly prioritizes the effectiveness and efficiency of bank supervision by applying the twin approaches of compliance-based supervision (CBS) and risk-based supervision (RBS). CBS stresses the monitoring of bank compliance and refers to the past banking conditions. The primary objective is that each bank operates properly in compliance with prudential banking principles. In contrast, RBS represents a forward-looking approach to supervision which allows the supervisory authority to keep greater room for proactive actions (see Bank Indonesia, 2009). Given this environment, this study has examined risk implications of the recent trends regarding diversified financial products that provide banks with additional sources of income in the Indonesian banking industry. Our study provides clear evidence that product diversification causes small-sized banks to reduce bank risk successfully but magnifies bank risk for large-sized banks. The results in the Indonesian banking industry are different from those of Lepetit et al. (2008) in the European banking industry whereby the positive link between product diversification and bank and insolvency risk is more significant for small-sized banks. Furthermore, the results from our models demonstrate, to different extents, that greater reliance on commission and fee activities is associated with higher bank risk in terms of earnings volatility particularly for small-sized banks. Our results have important policy implications related to bank supervision from the perspective of bank risk in the Indonesian banking industry. The argument that product diversification increases bank risk for large-sized banks suggests that deregulation practices that encourage banks to pursue non-traditional activities may adversely affect the banking system due to the sizeable market share of large-sized banks. Thus, the financial authorities, including Bank Indonesia, must carefully monitor large banks’ behavior related to various bank and insolvency risks, such as credit risk, market risk, liquidity risk, and operational risk, under the Basel II Accord framework. In particular, strict monitoring policies to reduce bank risk might be needed for large-sized banks. It should be noted that our regression analysis has some limitations. For example, we have focused on the discussion about how product diversification affects risk measures in relation to banks’ asset size. However, when we examine the role of product diversification, the analysis should take into account not only bank risk but also bank profitability or efficiency due to their close interactions. More careful and extensive examination about the relationship among product diversification, bank risk, and bank profitability should be conducted to understand the in-depth feature of the Indonesian banking industry. Next, our empirical analysis is based on averaged data over the small sample period from 2002 to 2008. The small sample may cause substantial sample biases in our estimation results. Moreover, the use of averaged data cannot enable us to capture the dynamic aspects, including structural changes, although the Indonesian banking industry has been developing rapidly with continuous changing environments. Regarding future research directions, this initial study can also be extended in several interesting directions. One possibility is to examine the relationship between income structure and bank risk in the rural banking industry as rural banks have been playing an increasingly important role in rural development. Generally, rural banks have monopoly power due to the fact that people experience some difficulty in accessing funds in their regions where there are few commercial banks. Appropriate regulatory policies for rural banks might be different from those for urban commercial banks. Another direction is to incorporate market-based risk measures into our discussion. The market-based risk measures can supplement traditional analysis, which is based on financial accounting statements, with forward-looking information from security prices. Most large banks are now listed on the Indonesian Stock Exchange, and thus face regulatory monitoring and the daily scrutiny of stock market participants. Finally, to date, there has been no empirical and theoretical work performed on these important issues in the Indonesian banking industry. Although we admit that it is challenging to verify empirically these important problems due to a lack of data, we hope that the results derived in this paper can be a good starting point and benchmark to test the relationship between product diversification and bank risk in Indonesia.