the effect of financial inclusion towards bank's risk and

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PERFORMANCE ON INDONESIA TIER 1 BANKS IN 2015-2019

By

Kevin Gerald Jayadi 11603024

BACHELOR’S DEGREE in

BUSINESS ADMINISTRATION

FACULTY OF BUSINESS AND COMMUNICATION

SWISS GERMAN UNIVERSITY The Prominence Tower

Jalan Jalur Sutera Barat No. 15, Alam Sutera Tangerang, Banten 15143 - Indonesia

July 2020

Revision after Thesis Defense on July 8, 2020

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Kevin Gerald Jayadi STATEMENT BY THE AUTHOR

I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgement is made in the thesis.

Kevin Gerald Jayadi

_____________________________________________

Student Date

Approved by:

Dr. Antonius T.P. Siahaan, SE. Ak, MM, CA

_____________________________________________

Thesis Advisor Date

Dr. Nila K. Hidayat, SE., MM.

_____________________________________________

Dean Date

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Kevin Gerald Jayadi ABSTRACT

THE EFFECT OF FINANCIAL INCLUSION TOWARDS BANK’S RISK AND PERFORMANCE ON INDONEISA TIER 1 BANKS IN 2015-2019

By

Kevin Gerald Jayadi

Dr. Antonius T.P. Siahaan, SE. Ak, MM, CA, Advisor

SWISS GERMAN UNIVERSITY

Financial Inclusion is a process of giving ease access to society in order to use financial services. With an easy access to financial services, bank will also take an impact on its risk and performance. The increasing of financial inclusion will lead into bank’s risk reduction and performance improvement. According to the title, this research will be analyzing the influence of financial inclusion to bank’s risk and performance of Indonesia Tier 1 Banks for the period 2015-2019 and adopt 7 numbers of samples of banks. This research determines the result of variables that are affecting bank’s risk and performance. This research uses non performing loans, return on average asset and return on average equity to determine bank’s risk and performance, also the regression panel data analysis to determine the relationship between bank branches and national financial inclusion index, towards bank’s risk and performance.

All the data is obtained from Otoritas Jasa Keuangan (OJK) and Indonesia Stock Exchange (IDX). The result is estimated by using random effect model. Based on the regression result, financial inclusion have no significant impact towards bank’s risk but have a significant impact towards bank performance.

Keywords: Financial Inclusion, Bank Branches, National Financial Inclusion Index, Return on Average Asset, Return on Average Equity

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Kevin Gerald Jayadi

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Kevin Gerald Jayadi DEDICATION

I am dedicating this thesis research to my beloved family, friends, advisor, and all the lecturers.

“Talk Less, DO More”

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Kevin Gerald Jayadi ACKNOWLEDGEMENTS

First and foremost, I would like to thank Jesus All Mighty for the strength, patience and healthiness during my years of study in Swiss German University. Also, for all my family members who support me for working on my thesis. My Parents and Sibling, Gaby, Indri Kristinawati and Iwan Jayadi.

I wish to thank my thesis advisor Dr. Antonius T.P. Siahaan, SE. Ak, MM, CA for his time, energy, guidance, and kindness to help me structuring and writing this thesis.

Thank you for being patient in helping to complete my thesis.

Thanks to all my colleagues who complete their thesis together with me Jennifer Wijaya, Maria Vania, David Michael and Muhammad Bahuri

Thanks to my friends who gave me support and help completing my thesis Iqbal Pippo Santoso, Dicken Nuary, Jodie Wisesa, Abajilly Azad, Dwi Jayandra, Valentino Ardian, Richard Bramantyo, Aurora Dinda, Moneta Putri, Liliana Dian Jayanti, Adhiatma Jodie Prasetyo, Leonides Bantang Tamarjaya

Last but not least, I want to thank me for believing in me, for doing all this hard work, and for never quitting.

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Kevin Gerald Jayadi TABLE OF CONTENTS

STATEMENT BY THE AUTHOR ... 2

ABSTRACT... 3

DEDICATION ... 5

ACKNOWLEDGEMEN TS ... 6

TABLE OF CONTENTS ... 7

LIST OF FIGURES ... 9

LIST OF TABLES ... 10

CHAPTER 1 - INTRODUCTION ... 11

1.1 Background... 11

1.2 Research Problem ... 13

1.3 Research Questions ... 13

1.4 Research Objectives ... 14

1.5 Scope and Limitations ... 14

1.6 Significance of Study ... 15

CHAPTER 2 - LITERATURE REVIEW ... 16

2.1 Financial Inclusion ... 16

2.1.1 National Financial Inclusion... 18

2.1.2 Bank Branches ... 19

2.1.3 Bank’s Total Asset ... 20

2.1.4 Equity Ratio ... 20

2.1.5 Capital Ratio ... 21

2.1.6 Loan to Deposit Ratio... 21

2.2 Bank Risk ... 22

2.2.1 Credit risk ... 22

2.2.2 Non Performing Loans (NPL) ... 23

2.2.3 Market risk... 23

2.2.4 Liquidity risk ... 24

2.2.5 Operational Risk ... 24

2.2.6 Legal Risk... 24

2.2.7 Strategic risk ... 24

2.2.8 Compliance Risk ... 25

2.2.9 Reputational Risk ... 25

2.3 Financial Performance ... 25

2.3.1 Return on Asset (ROA) ... 26

2.3.2 Return on Asset (ROE)... 27

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Kevin Gerald Jayadi

2.5 Study Differences and Similarities ... 30

2.6 Research Model ... 31

2.7 Hypothesis ... 32

CHAPTER 3 – RESEARCH METHODS ... 34

3.1 Type of Study ... 34

3.2 Unit Analysis ... 34

3.3 Sample Design ... 35

3.3.1 Population and Sample ... 35

3.3.2 Sampling Method ... 36

3.4 Location and Time Frame of Study ... 36

3.5 Type of Data and Collection Method ... 36

3.6 Variable Operationalization... 37

3.7 Data Processing Procedure ... 39

3.7.1 Chow Test... 39

3.7.2 Hausman Test ... 40

3.7.3 Regression Analysis ... 40

3.8 Data Analysis Technique... 40

3.8.1 Descriptive Statistic ... 41

3.8.2 Panel Data Analysis... 41

CHAPTER 4 – RESULTS AND DISCUSSIONS... 42

4.1 Brief Industry Profile... 42

4.2 Data Analysis... 43

4.3 Descriptive Statistic ... 43

4.4 Chow Test... 45

4.5 Hausman Test ... 46

4.6 Multiple Regression Analysis... 48

4.7 Hypothesis Result and Discussion... 55

CHAPTER 5 – CONCLUSIONS AND RECCOMENDATIONS ... 59

5.1 Conclusions ... 59

5.2 Recommendations ... 61

APPENDICES ... 62

REFERENCES ... 64

CURRICULUM VITAE ... 66

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Kevin Gerald Jayadi LIST OF FIGURES

Figures Page

Figure 1. 1 Reasons that Prevented Indonesia’s Unbanked Adult Population to Have a Financial Account in 2017 ... 11 Figure 2. 1 Research Model ... 31

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Kevin Gerald Jayadi LIST OF TABLES

Table Page

Table 2. 1 Previous Studies... 29

Table 3. 1 Variable Operationalization ... 39

Table 4. 1 Market Capitalization Table ... 42

Table 4.3. 1 Descriptive Statistic Table ... 44

Table 4.4. 1Chow Test for first equation (NPL) ... 45

Table 4.4. 2Chow Test for second equation (ROAA) ... 45

Table 4.4. 3 Chow Test for third equation (ROAE) ... 46

Table 4.5. 1 Hausman Test for first equation (NPL) ... 46

Table 4.5. 2 Hausman Test for second equation (ROAA) ... 47

Table 4.5. 3 Hausman Test for third equation (ROAE) ... 47

Table 4.6. 1 Multiple Regression Result for first equation (NPL)... 48

Table 4.6. 2 Multiple Regression Result for second equation (ROAA) ... 50

Table 4.6. 3 Multiple Regression Result for third equation (ROAE) ... 52

Table 4.6. 4 Summary of Regression Analysis ... 54