The Implication of Bank Competition on Bank Performance and Risk: An Empirical Study of Rural Banks in Indonesia
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Abstract
Amidst the phenomenon of many rural banks ceasing operations in Indonesia, this study aims to test whether banking competition influences the performance and stability of rural banks in Indonesia (BPR and BPRS). Additionally, we examine the differences between conventional and Sharia rural banks regarding the impact of competition on banking performance and stability. The data for this study includes rural bank data (BPR and BPRS) from Java, Indonesia, obtained from the Financial Services Authority website for the period 2017 to 2022, yielding a total of 5,047 observations. Using a fixed effects regression model to analyse the data and apply a random effects model for robustness testing, the results indicate that high market power negatively affects banking performance and stability. Further analysis reveals a differing concentration effect between conventional rural banks (BPR) and Sharia rural banks (BPRS). We find that banking concentration positively affects the stability of BPR (conventional) banks, while it negatively impacts the stability of BPRS (Sharia) banks. This study provides an empirical contribution by demonstrating that lower banking competition at the rural bank level negatively impacts banking performance and stability. This finding adds to the literature supporting the competition-stability hypothesis in the context of Indonesia’s rural banking industry.
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