The Effect of Non-Traditional Product Income on Banks Risk and Profitability: a Case Study of Listed Indonesian Commercial Banks for the Year 2007-2013
The deregulation policies have made the borders between bank and non-bank financial institutions and financial products in Indonesian banking industry start to break down. These policies have increased the competitive pressure and led to the deep changes in banking strategies. Banks start to shift their business into less traditional financial activities and increase their involvement in non-traditional activities through product diversification that generates non-interest income. However, the effect of this shift is still questionable, whether the shift is significantly impact or positively related to the performance of the bank. Therefore, this study aims to analyze the effect of non-traditional product on banks risk and profitability. a balanced panel data of the 29 public listed banks in Indonesia during the period of 2007- 2013 is employed in this study. This study found that diversification into non-interest income is positively related but not significantly impact the risk-adjusted returns and insolvency risk. However, diversification within non-interest income is negatively related to insolvency risk and risk-adjusted returns. on the other hand, diversification into and within non-interest income is positively related to the banks profitability.
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