Cost efficiency, innovation and financial performance of banks in Indonesia

Abstract

Purpose

This study aims to examine the effect of financial innovation, financial ratios, cost efficiency and good corporate governance on the financial performance of banks in Indonesia.

Design/methodology/approach

The data in this study are in the form of annual financial statements of conventional banks in Indonesia. The effect of cost efficiency, innovation and financial performance of banks in Indonesia is expected to be evident in 2009–2018. The research method used is the panel regression method.

Findings

The results show that financial innovation affects the financial performance of banks. Cost efficiency has a negative effect on the financial performance of banks. Financial ratio, which is proxied by the capital adequacy ratio (CAR) and loan to deposit ratio, has a positive effect on return on asset and net interest margin. Financial ratio, which is proxied by nonperforming loan and equity to total assets, has a negative effect on return on asset and return on equity. Good corporate governance (GCG), which is proxied by the proportion of managerial ownership (PMO), does not affect the financial performance of banks, whereas GCG, which is proxied by the proportion of independent board of directors, has a negative and significant effect on the financial performance of banks in Indonesia.

Practical implications

These results are a warning to bankers and the government to be cautious when formulating a strategy for the financial performance of banking.

Originality/value

Cost efficiency and financial innovation are important for the financial performance of banking. However, the possible impact of cost efficiency and financial innovation in Indonesia does not have a significant impact. The study uses static panel estimation techniques to analyze the data.

Citation

Khalifaturofi'ah, S.O. (2023), "Cost efficiency, innovation and financial performance of banks in Indonesia", Journal of Economic and Administrative Sciences, Vol. 39 No. 1, pp. 100-116. https://doi.org/10.1108/JEAS-07-2020-0124