Determinants of Net Interest Margin in Indonesian Banking Industry: The Moderating Role of Central Bank Interest Rate

Abstract

This article is to examine the relationship between net interest margin (NIM) and its determinants: risk averse level, liquidity risk, and credit risk. In addition, the article aims to investigate the moderating role of central bank interest rate on the relationship. We observe 17 Indonesian banks, which are listed on Indonesia Stock Exchange in 2017 – 2021 period. We run panel data regression model with 380 firm-year total observations. The Hausman test suggests that we use Random Effect Model (REM) for the parameter estimation. Our study confirms that NIM is determined by credit risk, liquidity risk, and risk averse level. Other than that, we found that central bank interest rate moderates well the relationship of NIM and its determinants by which the dynamic of the relationship of net interest margin and its determinants can be explained. The presence of the central bank interest rate consistently explains the dynamics of the relationship between NIM, risk averse level, liquidity risk, and credit risk. Our model accommodates the positive/negative relationship of NIM and its determinants: credit risk, liquidity risk, and risk averse level. These findings are expected to shed light on the mixed and inconsistent findings of previous research. The ongoing impact of the central bank interest rate consistently elucidates the dynamics between NIM, risk aversion level, liquidity risk, and credit risk. These findings are expected to bring clarity to the mixed and inconclusive results observed in prior research.