THE EFFECT OF INFLATION, BI RATE AND LPS GUARANTEE INTEREST ON INTEREST EXPENSE RATIO AND NET INTEREST MARGIN OF RURAL BANKS IN INDONESIA
Naufal Wicaksono1, Hesti Budiwati2
Universitas Jember1
STIE Widya Gama Lumajang2
Email: naufalw19@gmail.com1 Email: hestibudiwati1404@gmail.com2
Abstract
The objective of this research is to test the effect of inflation, BI Rate and LPS interest guarantee on Interest Expense Ratio and Net Interest Margin. The research was conducted on Rural Banks in Indonesia. The samples were 100 banks that using quarterly financial reports of 4 quarterly periods for each bank. By using purposive sampling technique, it was obtained 400 samples of Rural Banks financial reports. The analysis technique used is multiple linear regression with the classical assumption test previously and followed by hypothesis test. The multiple linear regression was done in two stages, the first stage is testing the effect of BI Rate and LPS interest guarantee on Interest Expense Ratio and the second stage is testing the effect of inflation, BI Rate, LPS interest guarantee and Interest Expense Ratio on Net Interest Margin. The research result states that inflation, BI Rate and LPS interest guarantee have significant on Interest Expense Ratio and Net Interest Margin partially. Meanwhile, the Interest Expense Ratio has significant effect on Net Interest Margin. Overall, 8.9% of Interest Expense Ratio on Rural Banks in Indonesia can be explained by inflation, BI Rate and LPS interest guarantee. In addition, 67.1% of Net Interest Margin on Rural Banks in Indonesia can be explained by inflation, BI Rate, LPS interest guarantee and Interest Expense Ratio. The further research is expected to study other variables that affect bank profits.
Keyword: Inflation, BI Rate, LPS Interest Guarantee, IER, NIM.
INTRODUCTION
Banking is a type of business that vulnerable to being affected by surrounding factors. Besides bank internal factors, bank external factors including economic conditions and financial authority policies can also affect the bank operational activities. The bank management capability is needed to manage bank well, especially in facing uncontrollable external factors. The bank external factors can affect bank operational activities can be in the form of economic conditions and policies determined by the financial authorities in Indonesia such as inflation, BI Rate and LPS guarantee interest rate. Simply, inflation is increase in prices generally and continuously.
According to Kompasiana (June 17, 2015) is discussing financial system stability related to the inflation policy and its effect on financial institutions.
Meanwhile, the BI Rate according to a review in Kompas Ekonomi (April 29, 2016), the BI Rate failure in dealing with inflation is because the lack of smooth transmission of the BI Rate to bank interest rates. The BI Rate will first pass the banking interest rates before affecting inflation. At first, the BI Rate will affect interbank loan interest rates as banking liquidity reflection.
Furthermore, the BI Rate will be transmitted to deposit interest rate, especially savings and deposit. After deposit interest rate is adjusted, the bank will adjust its interest rates. But the fact that happened, the BI Rate transmission to bank interest rates is not always smooth. In fact, at
On September 22, 2004, the President of the Republic of Indonesia ratifies the Law of the Republic Indonesia Number 24 concerning the Deposit Insurance Institution. For this duty and authority, the Deposit Insurance Institution issues deposit guarantee interest.
Several studies on macroeconomic condition and its effect on company activities have been done, including Maulan Irwadi (2014) with “Pengaruh Inflasi dan BI Rate terhadap Laba Perbankan di Indonesia”. The 29 bank samples that listed on the Indonesia Stock Exchange which publish financial statements from 2008 to 2012. The results showed that inflation and BI Rate, both simultaneously and partially have no significant effect on banking profit. Furthermore, a study done by Endang Winarsih, et al (2015) with “Pengaruh Pertumbuhan Ekonomi, Nilai Tukar, Tingkat Bunga, dan Inflasi terhadap Permintaan Kredit di Indonesia (Studi Kasus Bank Umum Periode 2008 Q1 – 2015 Q4)”. The estimation results are using OLS method showed that exchange rate and credit interest rate have significant effect on LDR, economic growth and inflation have no significant effect on LDR. Meanwhile, a study by I Ketut Wardana, et al (2016) with “Dampak Kebijakan Suku Bunga Bank Indonesia terhadap Return on Asset Bank Perkreditan Rakyat di Provinsi Bali”. The analysis results showed that only NPL has a significant effect on ROA performance. Increase in SBI will have a positive effect on LDR, so on the further step the LDR has a positive effect to support ROA performance. So, increase in SBI interest rate will increase the third party fund and reduce the source of linkage funds sourced from the assistance of Commercial Bank.
Furthermore, this research aims to answer problem questions through the following hypotheses:
a. Does inflation has a significant effect on Interest Expense Ratio?
b. Does the BI Rate has a significant effect on Interest Expense Ratio?
c. Does the LPS guarantee interest has a significant effect on Interest Expense Ratio?
d. Does inflation has a significant effect on Net Interest Margin?
e. Does the BI Rate has a significant effect on Net Interest Margin?
f. Does the LPS guarantee interest has a significant effect on Net Interest Margin?
g. Does Interest Expense Ratio has a significant effect on Net Interest Margin?
The hypotheses to answer questions in the formulation of the problem as follows:
Hypothesis 1 : There is significant inflation effect on Interest Expense Ratio.
Hypothesis 2 : There is significant BI Rate effect on Interest Expense Ratio.
Hypothesis 3 : There is significant LPS guarantee interest effect on Interest Expense Ratio.
Hypothesis 4 : There is significant inflation effect on Net Interest Margin.
Hypothesis 5 : There is significant BI Rate effect on Net Interest Margin.
Hypothesis 6 : There is significant LPS guarantee interest effect on Net Interest Margin.
Hypothesis 7 : There is significant Interest Expense Ratio on Net Interest Margin.
RESEARCH METHOD
Research Design
The type of research is quantitative research by looking for causal relationships between variables.
Therefore, multiple linear regression analysis technique is used to test hypotheses that stated there is inflation, the BI Rate and LPS guarantee interest effect partially on Interest Expense Ratio and Net Interest Margin.
Research Object
The object of research is financial data consist of inflation, the BI Rate, LPS guarantee interest, Interest Expense Ratio and Net Interest Margin on Rural Banks in Indonesia.
The selection of the research objects are based on the following considerations:
a. Rural banks and their activities have a strong influence on economic balance in Indonesia.
b. Rural banks in Indonesia are enough to compete with commercial banks in gaining public trust.
c. Rural banks already issue financial statements that are published according to the format determined by Bank Indonesia, so it supports this study in meeting the need for financial data for analysis.
Data Source and Type
The data source is secondary data published on Bank Indonesia and Financial Services Authority.
Data measured in ratio scale is inflation, the BI Rate, LPS guarantee interest, Interest Expense Ratio and Net Interest Margin.
Population and Sampling Technique
The population in this study is rural banks in Indonesia. The sampling is done by purposive sampling method. The criteria for rural banks that can be used as samples in this study are:
a. Conventional rural banks in Indonesia.
b. Active in publishing its financial statement on the Financial Services Authority directory.
c. Have a complete information that needed in this study namely Interest Expense Ratio and Net Interest Margin.
d. Quarterly financial statements of 2016 to 2017.
Based on the sampling results by purposive sampling method, the sample obtained is 400 financial statements for 4 quarterly periods of 100 rural banks in Indonesia.
Data Analysis Technique
Picture 1. Research Model
The data analysis technique in this study is done by using multiple linear regression analysis model by using IBM SPSS 24. Previously, the instrument test will be done because the research instrument used is a questionnaire which must tested its validity and reliability. After the instrument test is done, furthermore, classical assumption test is done, including data normality test, multicollinearity test and heteroscedasticity test.
After multiple linear regression analysis is done, then testing the hypothesis that used to determine whether there is effect and how much the effect of independent variables on dependent variables, both partially and simultaneously. By using the t-test for partial test, the F test for simultaneous test and determination coefficient.
RESULT AND DISCUSSION
Research Result
A good regression model must free from deviation problem on classical assumption or basic assumption. The following are the test results on classical assumption in regression model. The data normality test result showed there is normal graphic pattern where the dots are not far from the diagonal line, it means that the two regression models are normally distributed. The results of
Inflation (X1)
The BI Rate (X2)
LPS Guarantee Interest (X3)
Net Interest Margin (Y2)
Interest Expense Ratio (Y1)
independent variables used in this study do not show multicollinearity, which means that all independent variables in this study are mutually independent variables. The results of heteroscedasticity test showed that there is no clear pattern in those dots. It shows that the regression model does not have a heteroscedasticity, which means that there is no significant disturbance in this regression model. The autocorrelation testing is done by using Durbin-Watson test, the Durbin-Watson value or d’ count is obtained on the first regression of 1.810 and the second regression of 1.913. Both lies between 1.55 < d < 2.46, it means that there is no autocorrelation, so further testing can be done because the autocorrelation-free assumption has been met.
The first stage multiple linear regression equation model is resulting the following Unstandardized Coefficient equation:
Y1 = 55.985 + 6.045 X1 + 4.093 X2 – 6.681 X3
The second stage multiple linear regression equation model is resulting the following Unstandardized Coefficient equation:
Y1 = 14.823 + 0.544 X1 + 1.166 X2 – 2.102 X3 + 0.331Y1
It is known that coefficient determination (R2) obtained from R Square on the first stage regression is 0.089. It means that 8.9% of Interest Expense Ratio on the rural banks in Indonesia can be explained by inflation, the BI Rate and LPS guarantee interest. While the remaining 91.1% of Interest Expense Ratio was affected by other variables not examined in this study. Furthermore, coefficient determination (R2) obtained from R Square on the second stage regression is 0.671. It means that 67.1% of Net Interest Margin on the rural banks in Indonesia can be explained by inflation, the BI Rate, LPS guarantee interest and Interest Expense Ratio. While the remaining 32.9% of Net Interest Margin was affected by other variables not examined in this study such as Operational Costs on Operational Revenues, Earning Assets Quality and Nonperforming Loan.
Furthermore, the hypotheses testing are done and obtained the following results:
1) First Hypothesis
Hypothesis 1 : There is significant inflation effect on Interest Expense Ratio.
The results of the t-test on variable X1, namely inflation, the value of t count = 4.950 with a significance of 0.000. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719. It means that t count (4.950) > t table (1.9719) with a significance level of 0.000 below the 0.05 significance limit, it can be concluded that there is significant inflation effect on Interest Expense Ratio.
2) Second Hypothesis
Hypothesis 2 : There is significant BI Rate effect on Interest Expense Ratio.
The results of the t-test on variable X2, namely the BI Rate, the value of t count = 3.418 with a significance of 0.001. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719. It means that t count (3.418) > t table (1.9719) with a significance level of 0.001 below the 0.05 significance limit, it can be concluded that there is significant BI Rate effect on Interest Expense Ratio.
3) Third Hypothesis
Hypothesis 3 : There is significant LPS guarantee interest effect on Interest Expense Ratio.
The results of the t-test on variable X3, namely the LPS guarantee interest, the value of t count = 2.909 with a significance of 0.004. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719. It means that t count (2.909) < t table (1.9719) with a significance level of 0.004 below the 0.05 significance limit, it can be concluded that there is significant LPS guarantee interest effect on Interest Expense Ratio.
4) Fourth Hypothesis
Hypothesis 4 : There is significant inflation effect on Net Interest Margin.
The results of the t-test on variable X1, namely inflation, the value of t count = 1.687 with a significance of 0.092. By using 10% or 0.1 significance limit, the value of t table is ± 1.6525. It means that t count (1.687) > t table (1.6525) with a significance level of 0.092 below the 0.1
significance limit, it can be concluded that there is significant inflation effect on Net Interest Margin, but on 10% significance level.
5) Fifth Hypothesis
Hypothesis 5 : There is significant BI Rate effect on Net Interest Margin.
The results of the t-test on variable X2, namely the BI Rate, the value of t count = 3.742 with a significance of 0.001. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719. It means that t count (3.742) > t table (1.9719) with a significance level of 0.001 below the 0.05 significance limit, it can be concluded that there is significant BI Rate effect on Net Interest Margin.
6) Sixth Hypothesis
Hypothesis 6 : There is significant LPS guarantee interest effect on Net Interest Margin.
The results of the t-test on variable X3, namely the LPS guarantee interest, the value of t count = - 3.531 with a significance of 0.004. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719. It means that t count (-3.531) < t table (1.9719) with a significance level of 0.004 below the 0.05 significance limit, it can be concluded that there is significant LPS guarantee interest effect on Net Interest Margin.
7) Seventh Hypothesis
Hypothesis 7 : There is significant Interest Expense Ratio effect on Net Interest Margin.
The results of the t-test on variable Y1, namely Interest Expense Ratio, the value of t count = 25.713 with a significance of 0.000. By using 5% or 0.05 significance limit, the value of t table is ± 1.9719.
It means that t count (25.713) > t table (1.9719) with a significance level of 0.000 below the 0.05 significance limit, it can be concluded that there is significant Interest Expense Ratio effect on Net Interest Margin.
DISCUSSION
The Effect of Inflation on Interest Expense Ratio
The results of hypothesis testing showed that there is significant inflation effect on Interest Expense Ratio. Inflation has significant effect on Interest Expense Ratio, with a positive direction.
It means that as inflation increases, the Interest Expense Ratio will also increase and conversely, as inflation decreases, the Interest Expense Ratio will also decrease. The results of this study is contradict with the results of studies by Maulan Irwadi (2014), Endang Winarsih (2015) and Indah and Nyoman (2017) which in their studies, inflation has insignificant effect. Simply, inflation is increase in prices generally and continuously. Increase in prices of just one or two goods cannot be called as inflation unless the increase is widespread (or lead to price increases) on other goods. The financial system stability related to inflation policy and its effect on financial institutions. The financial stability has been known by economists, especially financial market participants. In principle, financial stability is related to 2 (two) elements, namely price stability and financial sector stability, which includes financial institutions and financial markets that overall support the running of the financial system. If one of the elements is disturbed or cannot function well, the other will be affected. In this case, inflation is banking external factor, turns out to have an effect on Interest Expense Ratio where Interest Expense Ratio is measure of cost of funds collected by rural banks that can show the efficiency of rural banks in collecting its sources of funds. With high inflation, it can disrupt the efficiency of rural banks in collecting its sources of funds.
The Effect of BI Rate on Interest Expense Ratio
The results of hypothesis testing showed that there is significant BI Rate effect on Interest Expense Ratio. The BI Rate has significant effect on Interest Expense Ratio, with a positive direction. It means that as the BI Rate increases, the Interest Expense Ratio will also increase and conversely,
support the results of study by Heri Sudarsono (2009), but contradict with the results of studies by Ni Luh Putu Basrita Sutasar, et al (2013), Maulan Irwadi (2014) and I Ketut Wardana, et al (2016).
The policy interest rate that reflecting the stance of monetary policy set by the Bank Indonesia and announced to the public. The BI Rate is announced by the Board of Governors of Bank Indonesia every month and is implemented on monetary operations carried out by Bank Indonesia through liquidity management in the money market in order to meet operational targets of the monetary policy. Operational targets of the monetary policy are reflected on interest rate of Overnight Interbank Money Market (PUAB O/N). The movement on interest rate of PUAB is expected will followed by developments in deposit rates and in turn banking lending rates. Before the effect of BI Rate reach inflation, the BI Rate will first pass the banking interest rates. In normal conditions, first of all, the BI Rate will affects the interbank lending rates as a reflection of banking liquidity.
Furthermore, the BI Rate will be transmitted to deposit interest rates, especially savings and deposit. After deposit interest rate is adjusted, the bank will adjust its interest rates. In this case, it can be explained that the BI Rate has effect on Interest Expense Ratio.
The Effect of LPS Guarantee Interest on Interest Expense Ratio
The results of hypothesis testing showed that there is significant LPS guarantee interest effect on Interest Expense Ratio. The LPS guarantee interest has significant effect on Interest Expense Ratio, with a negative direction. It means that as the LPS guarantee interest increases, the Interest Expense Ratio will decrease and conversely, as the LPS guarantee interest decreases, the Interest Expense Ratio will increase. The LPS guarantee interest functions to guarantee customer deposits in order to create a sense of security for customers who deposit funds in bank and keep the banking system stability. A high LPS guarantee interest is very liked by the public because they have opportunity to earn high interest incomes from bank with a guarantee from the government.
However, there is advantages and disadvantages from the bank of the high LPS guarantee interest.
If the LPS guarantee interest is high, the bank has a chance to get as many public funds by utilizing public interest at high rates. On the other side, this will make the bank to spend a high interest expenses which cause the spread margin decrease. This condition explains why the LPS guarantee interest has effect with a negative direction with Interest Expense Ratio.
The Effect of Inflation on Net Interest Margin
The results of hypothesis testing showed that there is significant inflation effect on Net Interest Margin. Inflation has significant effect on Net Interest Margin, with a positive direction. It means that as inflation increases, the Net Interest Margin will also increase and conversely, as inflation decreases, the Net Interest Margin will also decrease. The results of this study is contradict with the results of studies by Maulan Irwadi (2014), Endang Winarsih (2015) and Indah and Nyoman (2017) which in their studies, inflation has insignificant effect. In this case, inflation is banking external factor which turns out affect Net Interest Margin, where Net Interest Margin is a measure that representing rural banks capability in earning net interest income. The NIM ratio is obtained from a comparison between net interest income with average earning assets. The average earning assets are measured by total earning assets on January to December then divided by 12.
Considering banking main activity is act as intermediary, namely collecting and distributing public funds, bank operating costs and income are dominated by costs and interest yield. NIM is used to measure bank management capability in managing its earning assets to earn net interest income.
With high inflation, it can increase deposit interest rate, furthermore, bank will adjust its interest rate. In this case, it can explained that the BI Rate has effect on Net Interest Margin.
The Effect of BI Rate on Net Interest Margin
The results of hypothesis testing showed that there is significant BI Rate effect on Net Interest Margin. The BI Rate has significant effect on Net Interest Margin, with a positive direction. It means that as the BI Rate increases, the Net Interest Margin will also increase and conversely, as the BI Rate decreases, the Net Interest Margin will also decrease. The results of this study support the results of study by Heri Sudarsono (2009), but contradict with the results of studies by Ni Luh Putu Basrita Sutasar, et al (2013), Maulan Irwadi (2014) and I Ketut Wardana, et al (2016). The policy interest rate that reflecting the stance of monetary policy set by the Bank Indonesia and announced to the public. The BI Rate is announced by the Board of Governors of Bank Indonesia every month and is implemented on monetary operations carried out by Bank Indonesia through
liquidity management in the money market in order to meet operational targets of the monetary policy. Operational targets of the monetary policy are reflected on interest rate of Overnight Interbank Money Market (PUAB O/N). The movement on interest rate of PUAB is expected will followed by developments in deposit rates and in turn banking lending rates. Before the effect of BI Rate reach inflation, the BI Rate will first pass the banking interest rates. In normal conditions, first of all, the BI Rate will affects the interbank lending rates as a reflection of banking liquidity.
Furthermore, the BI Rate will be transmitted to deposit interest rates, especially savings and deposit. After deposit interest rate is adjusted, the bank will adjust its interest rates. In this case, it can be explained that the BI Rate has effect on Net Interest Margin.
The Effect of LPS Guarantee Interest on Net Interest Margin
The results of hypothesis testing showed that there is significant LPS guarantee interest effect on Net Interest Margin. The LPS guarantee interest has significant effect on Net Interest Margin, with a negative direction. It means that as the LPS guarantee interest increases, the Net Interest Margin will decrease and conversely, as the LPS guarantee interest decreases, the Net Interest Margin will increase. The LPS guarantee interest functions to guarantee customer deposits in order to create a sense of security for customers who deposit funds in bank and keep the banking system stability.
A high LPS guarantee interest is very liked by the public because they have opportunity to earn high interest incomes from bank with a guarantee from the government. However, there is advantages and disadvantages from the bank of the high LPS guarantee interest. If the LPS guarantee interest is high, the bank has a chance to get as many public funds by utilizing public interest at high rates. On the other side, this will make the bank to spend a high interest expenses which cause the spread margin decrease. This condition explains why the LPS guarantee interest has effect with a negative direction with Net Interest Margin. Net Interest Margin is a measure that representing rural banks capability in earning net interest income.
The Effect of Interest Expense Ratio on Net Interest Margin
The results of hypothesis testing showed that there is significant Interest Expense Ratio effect on Net Interest Margin. Interest Expense Ratio has significant effect on Net Interest Margin, with a positive direction. It means that as Interest Expense Ratio increases, the Net Interest Margin will also increase and conversely, as Interest Expense Ratio decreases, the Net Interest Margin will also decrease. The results of this study support the results of study by Hesti Budiwati (2018). Interest Expense Ratio is measure of cost of funds collected by rural banks that can show the efficiency of rural banks in collecting its sources of funds. In collecting the third-party funds which are one of source of funds, the bank will provide interest which is realized as a cost of funds. The smaller the cost of funds spent to obtain third-party funds from the public, the more efficient the bank is in managing its sources of funds, because it means that the spread margin received is higher.
Therefore, the bank capability is needed in collecting sources of funds from the public with low costs.
CONCLUSION
The objective of this research aims to know the effect of inflation, the BI Rate and the LPS guarantee interest on Interest Expense Ratio and Net Interest Margin.
a. Inflation has significant effect with a positive direction on Interest Expense Ratio, which means that as inflation increases, the Interest Expense Ratio will also increase and conversely, as inflation decreases, the Interest Expense Ratio will also decrease.
b. The BI Rate has significant effect with a positive direction on Interest Expense Ratio, which means that as the BI Rate increases, the Interest Expense Ratio will also increase and conversely, as the BI Rate decreases, the Interest Expense Ratio will also decrease.
c. The LPS guarantee interest has significant effect with a negative direction on Interest Expense Ratio, which means as the LPS guarantee interest increases, the Interest Expense Ratio will decrease and conversely, as the LPS guarantee interest decreases, the Interest Expense Ratio will increase.
d. Inflation has significant effect with a positive direction on Net Interest Margin, which means that as inflation increases, the Net Interest Margin will also increase and conversely, as inflation decreases, the Net Interest Margin will also decrease.
e. The BI Rate has significant effect with a positive direction on Net Interest Margin, which means that as the BI Rate increases, the Net Interest Margin will also increase and conversely, as inflation decreases, the Net Interest Margin will also decrease.
f. The LPS guarantee interest has significant effect with a negative direction on Net Interest Margin, which means as the LPS guarantee interest increases, the Net Interest Margin will decrease and conversely, as the LPS guarantee interest decreases, the Net Interest Margin will increase.
g. Interest Expense Ratio has significant effect with a positive direction on Net Interest Margin, which means that as Interest Expense Ratio increases, the Net Interest Margin will also increase and conversely, as Interest Expense Ratio decreases, the Net Interest Margin will also decrease.
RECOMMENDATION
Based on the study results above, the following recommendations are given to several parties:
a. For Bank Management
The results of this study as thoughts contribution on rural banks management in Lumajang to manage and maintain interest expense stability, interest income and capability to distribute funds in the form of credit. The level of intense competition between banks remains the main challenge in maintaining the balance because of the higher the level of competition, the tendency for interest expenses increase, interest income decrease and difficulty to distribute funds in the form of credit will increase. However, as long as the level of public trust on banks and banking health level is still can be maintained, the public still trusts to save their funds in the bank and take credits in the bank to meet their needs. By being able to maintain stability by getting public funds with low interest and distribute it back in the form of credits to the public with higher interests, a high spread margin is earned and eventually can increase bank profit.
b. For Further Research
The bank profit is affected by many factors that do not examine in this study, including operating expenses, accounts receivable loss allowance and other expenses. Therefore, it is interesting to study factors that can affect bank profit beside inflation, the BI Rate and the LPS guarantee interest. Besides, this study has limitations, which only study conventional rural banks, it is interesting to study on sharia rural banks. Because there may be different results.
