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Digital Transformation and Bank Profitability in Indonesia: The Role of Firm Size as a Moderating Variable

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This study investigates the effect of digital transformation on bank profitability in Indonesia, with firm size examined as a moderating variable. Specifically, it assesses whether digital transformation enhances financial performance and whether larger banks are better positioned to benefit from digital initiatives. Using a quantitative research design, the study analyzes panel data from 41 banks operating in Indonesia. A fixed-effects regression model is employed to estimate the direct effect of digital transformation on profitability, measured by return on assets (ROA) and return on equity (ROE), as well as the moderating effect of firm size. The results show that digital transformation has a positive and statistically significant effect on both ROA and ROE, indicating that investments in digital technologies improve banking performance. In addition, firm size positively moderates the relationship between digital transformation and profitability. Larger banks appear to derive greater benefits from digitalization due to their stronger technological infrastructure, greater financial capacity, and higher ability to invest in innovation and human capital. The study concludes that digital transformation is a key driver of bank profitability and that organizational scale enhances its effectiveness. These findings contribute to the literature on digital transformation and banking performance and offer practical implications for bank managers and regulators in formulating digital strategies that align with institutional size and capabilities.

Impact of Related Lending on Bank Health: Case Study in Indonesia Banking Industry

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Related lending is a critical driver of banks’ health, particularly on its profitability and risks profile. As banks engage in related lending activities, they face challenges in managing profitability and assessing various risks, including systemic and credit risks. Nevertheless, the banking literature presents divided views on this: the information view and the looting view. The information view posits that related lending could enhance bank profitability and reduce risks through improved information symmetry between banks and borrowers. Conversely, the looting view theorizes that related lending may deteriorate banks’ performance, reducing profitability and increasing risks, primarily due to the misallocation of resources and the prioritization of personal interests by banks’ insiders.

The challenges of related lending have been intensified by the global crisis of the COVID-19 pandemic. Empirical research indicate that banks tend to increase lending to related parties by up to 20% during economic difficulties, with more significant effects in emerging economy such as Indonesia. This trend is reflected in increasing related lending ratio and deteriorating financial indicators of publicly listed Indonesian banks, such as declining profitability ratios of return on assets (ROA) and net interest margin (NIM), as well as increasing risk ratios of higher non-performing loans (NPL) during the pandemic’s onset.

Therefore, this study will investigate the impact of related lending on bank health of publicly listed Indonesian banks across two critical periods, before crisis (2013-2019) and during the crisis due to the pandemic (2020-2022). By employing a quantitative approach through regression analysis, this study will be able to assess the relationship between bank profitability and risk ratios with their corresponding variables. The aim is to provide empirical evidence on whether related lending enhance or impair bank performance in terms of profitability and risk, particularly under the economic strains brought by the pandemic.