The Analysis of the Effect of Liqudity Risk and Credit Risk to the
Profitability in Conventional Banks of Indonesia
Diah Dianti Rohani, Indri Ayu Lestari and Amir Machmud
Universitas Pendidikan Indonesia, Jl. Dr. Setiabudhi 229, Bandung, Indonesia
Keywords: Liquidity Risk, Credit Risk, Profitability, Banking, Loan to Deposit Ratio (LDR), Non-Performing Loan
(NPL), Return On Assets (ROA).
Abstract: This paper aims to analyze the effect of liquidity risk and credit risk to the profitability in conventional
banks. The method used is explanatory survey. The data used in this study was secondary data from the
annual financial statements of each of the banks listed on the stock exchanges of Indonesia in 2007 - 2016.
The samples used are top 10 conventional Banks (chosen by asset). The method used is panel data
regression model. Liquidity risk is measured by Loan to Deposit Ratio (LDR), credit risk is measured by
Non-Performing Loan (NPL) and profitability is measured by Return On Assets (ROA). The result showed
that liquidity risk (LDR) and credit risk (NPL) have significant negative impact on the profitability (ROA)
in conventional banks.
1 INTRODUCTION
The existence of the banking sector as a sub-system
in the economy of a country has a significant role,
even the daily lifes of modern society largely
involve services from the banking sector. This is
because the banking sector has a primary function as
a financial intermediary between economic units
with a surplus of funds and underfunded economic
units. Through a bank, funds can be collected from
the community in various forms of deposits. Then,
the funds that have been collected are channeled
back by the bank in the form of credit to the business
sector or other parties in need. If the community life
and economic are more developed, it also needs to
increase the role of the banking sector through the
development of its services products (Rahmi, 2014).
Due to the relationship to the community, the
Bank must be able to improve its performance by
maintaining the bank's soundness. To keep its
performance, bank encounters various risks such as
liquidity risk and credit risk. According (Hartley, et
al., 2013), liquidity risk is a risk when the bank is
not able to provide funds/cash. Liquidity in
commercial banks is the ability to repay funds as the
due date.
Here are some previous studies that examined
the relationship between liquidity risk and bank
profitability showing differences in their research
results. A study by (Bourke, 1989) found that there
was a positive relationship between liquidity and
bank profitability in 90 banks in Europe, North
America and Australia in 1972-1981. In contrast,
other studies had different results from Bourke's
research, Such as (Molyneux & Thornton, 1992) and
(Goddard et al., 2004), they found that there was a
negative relationship between liquidity and
profitability in the European Bank of the late 1980s
to the mid-1990s.
(Funso, et al., 2012) state that of several risks
faced by banks, credit risk plays the role most in
bank profitability. Credit risk is the possibility of
losing the outstanding loan either in whole or in part
until the specified time (Basel Committee, 2001).
The effect of credit risk on profitability has been
done by several researchers. (Funso, et al., 2012)
found that Non Performing Loans negatively affect
the profitability of banks. Other researchers also
found similar results, as (Kargi, 2011) found that
credit risk had a negative effect on the Bank's
profitability in Nigeria. (Epure and Lafuente, 2012)
found that non-performing loans negatively affected
the performance of banks in Costa Rica between
1998 and 2007. Then, (Kithinji, 2010) found that
non-performing loans had no effect on commercial
bank profits in Kenya.
180
Rohani, D., Lestari, I. and Machmud, A.
The Analysis of the Effect of Liqudity Risk and Credit Risk to the Profitability in Conventional Banks of Indonesia.
In Proceedings of the 2nd International Conference on Economic Education and Entrepreneurship (ICEEE 2017), pages 180-183
ISBN: 978-989-758-308-7
Copyright © 2017 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

The purpose of this research is to analyze the
effect of liquidity risk and credit risk to profitability
by using explanatory survey method. The results of
this study can be used to find out what and how
much influence of risks that arise in maintaining the
soundness of a bank.
2 METHODS
The method used is explanatory survey. The
population in this study are Conventional
Commercial Banks listed on the Indonesia Stock
Exchange in 2007 - 2016. The sample technique
used in this study is purposive sampling with the
banks of which criterion having 10 largest assets in
Indonesia in 2016, so that there are 100 observation
data obtained.
The data collected was analyzed by panel data
regression by following the equation below:

 2211 XXY
(1)
Where:
Y = Profitability (ROA)
Α = Constants
β1, β2 = Regression Coefficient
X1 = Liquidity Risk (LDR)
X2 = Credit Risk (NPL)
ε = error term
Bank Indonesia Regulation Number 11/25 / PBI /
2010 concerning changes in PBI Number 5/8 / PBI /
2003 concerning the Implementation of Financial
Management Risk defines liquidity risk as a risk due
to the inability of the Bank to meet the obligations
due from sources of cash flow and / or high quality
liquid assets which can be used, without disrupting
the activity and the inancial condition of the bank.
Liquidity risk is calculated using the Loan Deposit
Ratio (LDR) proxy. LDR is the ratio between the
total amount of credit provided by the bank and
funds received by the bank (Dendawijaya, 2009).
Credit Risk according to Bank Indonesia
Regulation Number 11/25 / PBI / 2010 concerning
Changes in PBI Number 5/8 / PBI / 2003 concerning
Implementation of Risk Management is risk due to
failure of debtors and/or other parties to fulfill
obligations to banks. Credit risk arises because the
borrower is unable to meet its financial obligations
to the bank at the due date. Credit risk is calculated
using a Non Performing Loan (NPL) proxy. NPL is
the ratio of total loans with problem to total credit
given to third party (Dendawijaya, 2009).
Credit risk is calculated using a Non Performing
Loan (NPL) proxy. NPL is the ratio of total loans
with problem to total credit given to third party
(Dendawijaya, 2009).
Profitability is the ability of a company to
generate profit over a certain period. Profitability of
the company shows the comparison between profits
with assets or capital that generate such profits
(Dendawijaya, 2009). Profitability is calculated
using ROA proxy. ROA is the ratio between net
income and total company assets.
3 RESULTS AND DISCUSSION
Descriptive statistical analysis is used to provide an
overview of the variables in this study. Here are the
descriptive statistics results of each variable.
Table 1: Descriptive Statistics Results
Descriptive Statistics
N
Min
Max
Mean
Std. Dev
X1=LDR
100
43.60
108.86
83.4215
13.89627
X2=NPL
100
.37
8.83
2.7141
1.47527
Y=ROA
100
-4.90
5.15
2.3460
1.34636
Valid
N (listwise)
100
Based on Table 1. it can be seen that the number
of observation in this study is as many as 100 data.
The mean of liquidity risk (LDR) variable is 83.4215
with a maximum value of 108.86 and a minimum
value of 43.60.
The mean of credit risk variable (NPL) is 2.7141
with a maximum value of 8.83 and a minimum value
of 0.37. The mean of profitability variable (ROA) is
2.3460 with a maximum value of 5.15 and a
minimum value of -4.90. Based on the data, it can be
seen that all variables have greater mean value than
the standard deviation, so that it can be concluded
that the variable data are grouped or not varied.
From Table 2. it can be seen that the value of
Adjusted R2 obtained is 0.226 or 22.6%. This means
that the ratio of LDR and NPL can explain the
profitability of Conventional Commercial Banks in
2007 - 2016 projected through ROA of 22.6%, while
the remaining (77.4%) is influenced by other
variables that are not analyzed in this research.
The Analysis of the Effect of Liqudity Risk and Credit Risk to the Profitability in Conventional Banks of Indonesia
181

Table 2: Coefficient of Determination Test Results (R
2
)
Model Summary
Model
R
R Square
Adjusted R
Square
Std. Error of the
Estimate
1
.492
a
.242
.226
1.18430
a. Predictors: (Constant), X2=NPL, X1=LDR
From Table 3. It can be seen that the F
calculate
is
15,475 and has probability value of 0.000 <0.05, the
regression model of this study is to predict the
research variables.
Table 3: F Statistics Test Results
ANOVA
a
Model
Sum of
Squares
df
Mean
Square
F
Sig.
1
Regression
43.408
2
21.704
15.475
.000
b
Residual
136.048
97
1.403
Total
179.456
99
a. Dependent Variable: Y=ROA
b. Predictors: (Constant), X2=NPL, X1=LDR
Table 4: Regression Test Results
Coefficients
a
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std.
Error
Beta
1
(Constant)
5.589
.743
7.524
.000
X1=LDR
-.028
.009
-.285
-3.213
.002
X2=NPL
-.347
.081
-.380
-4.285
.000
a. Dependent Variable: Y=ROA
Based on the result of t-test method, it can be
seen the influences between liquidity risk and credit
risk variable to the profitability variable are as
follows:
1. The LDR variable has t
calculate
of -3.213 and t
table
of 1.9847. Therefore, t
calculate
<t
tabel
which is -
3.213 <1.9847 and has probability value of
0.002 <0.05, then H1 is rejected which means
LDR has significant negeative influence on
ROA.
2. The NPL Variable has t
calculate
value of -4.285
and t
table
of 1.9847. Therefore, t
calculate
<t
tabel
and
has a probability value of 0.000 <0.05, then H
2
is rejected, which means NPL has a significant
negative impact on ROA.
Based on the tabulation of statistical data in table
4., it creates linear regression equation as follows:
The value of constants obtained is 5,589. This means
that if the LDR and NPL variables do not exist or are
zero, then the profitability (ROA) is 5.589.
Based on the test results, it is obtained significant
level of probability of LDR (0.002); less than 0.05
and negative regression coefficient (0.028); so, it can
be concluded that H
1
is accepted and H
0
is rejected,
which means that LDR has significant effect on the
profitability with negative effect. These results
indicate that the greater the LDR, the smaller the
profitability and the smaller the LDR, the greater the
profitability with an increase of 0.028.
Based on the test results, it is obtained significant
level of NPL probability (0.000); less than 0.05 and
negative regression coefficient (0.347); so it can be
concluded that H
2
is accepted and H
0
is rejected,
which means that the NPL has significant effect on
profitability with a negative effect. These results in
indicate that the larger the NPL, the smaller the
profitability and the smaller the NPL, the greater the
profitability with an increase of 0.347.
Thi study shown that Loan to Deposit and Non
Performing Loan significantly influence negatively
on Return On Assets at Banks listed on Indonesia
Stock Exchange (IDX) in 2007-2016. This study is
in line with previous researchers, (Molyneux &
Thornton, 1992), (Goddard et al, 2004), (Funso et
al., 2012), (Epure and Lafuente, 2012) and (Kargi,
2011).
4 CONCLUSIONS
Some of the findings in this study either
descriptively or in verifiable way indicate that this
research has shown the fact that Loan to Deposit and
Non Performing Loan significantly influence
negatively on Return on Assets at Banks listed on
Indonesia Stock Exchange (IDX) in 2007-2016. The
limitation of this study is to use only two bank risks
(liquidity risk and credit risk) which play role in the
profitability of the company, other risks used in the
banking industry are market risk, operational risk,
legal risk, reputation risk, strategic risk and
compliance risk. Other variables are Net Interest
Margin (NIM), Operating Cost compared to
Operating Income (BOPO), Earning Asset Quality
and Inflation in order to obtain more varied results
that can illustrate the things that can affect the
profitability. The results of the study can be used as
input for policy makers especially those related to
bank profitability. The policy maker can use joint
management of liquidity risk and credit risk to
increase bank stability and monitoring credit
disbursement process to maintain good account.
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The Analysis of the Effect of Liqudity Risk and Credit Risk to the Profitability in Conventional Banks of Indonesia
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