ANALYSIS VARIABLES THAT INFLUENCED THE INCREASING OF NON-INTEREST INCOME IN THE INDONESIAN BANKING INDUSTRY (In the period of 1999-2003)

CHAPTER I

INTRODUCTION

1.1 . BACKGROUND

Banks today are under great pressure to perform in order to meet the objectives of their stockholders, employees, depositors, and borrowing customers, while somehow keeping government regulators satisfied that the bank’s policies, loans, and investments are sound. At the same time, competition for banks’ traditional loan and deposit customers has increased dramatically. Credit union, money market mutual funds, insurance companies, brokerage firms are fighting for a slice of nearly every credit and deposit market traditionally served by banks. Bankers have been called upon to continually reevaluate their loan and deposit policies, review their plans for expansion and growth and access their return and risk in light of this new competitive environment. In addition, there is the added problem of bank failures.

Bank are the most important sources of short-term working capital for businesses and have become increasingly active in recent years in making long term business loans for new plant and equipment. The assets held by Indonesian banking represent about 90% of the total assets of all financial institutions. For all these reasons and more, banks are the most important of society’s institutions for us to study and understand.

A number of theories have been advanced to explain why banks, and more generally financial intermediaries, exist. In most of these theories, banks exist because they mitigate a host of problems that otherwise prevent liquidity from flowing directly from agents with excess liquidity (depositors) to agents in need of liquidity (borrowers). These problems arise because of informational asymmetries, contracting costs, and scale mismatches between liquidity suppliers and liquidity demanders. Intermediation-based theories of financial institutions see banks as the solution to these problems, because: banks have a comparative advantage at gathering information on borrower creditworthiness; banks are better able than individual lenders to monitor borrowers; banks provide increased liquidity by pooling funds from many households and businesses and by issuing demandable deposits in exchange for these funds; and banks diversify away idiosyncratic credit risk by holding portfolios of multiple loans. (De Young and Rice, 2004)

Much of the empirical literature in commercial banking has followed these rich theoretical leads, analyzing the financial flows fundamental to the intermediation process (e.g., interest paid on deposits, interest received from loans and securities, and the resulting net interest margins) and the risks associated with those flows (e.g., liquidity risk associated with deposits, credit risk associated with loans, market risk associated with fixed income securities, and interest-rate risk associated with the relative maturities of deposits, loans, and securities). However, commercial bank business models have evolved over the past two decades, and today banks generate an increased portion of their income from no intermediation and/or non-interest activities. (De young and Rice, 2004)

When interest rates is going down and rely only on interest income nowadays is very risky, commercial banks business evolved to fee based income. There are still more chances that can be explored in order to raise fee income. Tight competition in banking industry and economic cycle caused each bank will always looking for new source income beyond interest loan and obligation. Fact showed, relied only on interest income is very risky. Because, profit will very volatile, something that is dislike by investor, especially commercial bank.

Beside those reasons, the existence of phenomenon financial services integration, like banking, insurance, mutual fund, pension fund, credit card, should be watchful. Related with this phenomenon is that financial product growth, for investment diversification and return maximizing. This phenomenon potential creating disintermediation (fund removal from banking to capital market, mutual funds, insurance, and etc)

Mutual funds for instance, according to Bank Indonesia (BI), in September 2001 still Rp 3,44 billion or 0.45% from total from third fund in banking. But less than a year, the number had already Rp 23,82 billion or 2,95% from total third fund of banking. The growth is more than 511%. (Info Bank, February 2003). If this trend is continuing, not only third fund growth that negative, the number also can be lessens. Third funds banking also predicted will be sucked up into insurance and pension funds.

Interest income beyond interest loan and obligation are called fee income or non-interest income. In bank’s financial report, this income categorize in “others operational income“(Pendapatan Operasional Lain, POL). In general, POL consist of 3 components that is provision, commission and fee; foreign eyxchange transaction income also others income. If looked at the tendencies, for some banks, POL had already become priority. Fee Income result table from some banks can describe. Unless rural development banks group (BPD), nearly all bank, even state, foreign even private, owned fee income with increasing trend and amount big enough.

Seen from the percentage, state banks fee income group were not too high and a little bit fluctuate, but from nominal side was very huge. State banks fee income group still dominated commissions and credit provision. This matter becomes indication that increasing of state bank’s fee income is compliance with loan growing.

While, for foreign banks group, fee income portion had already high and not always associates with loan number. Standard Chartered and JP Morgan, for instance, instead gain fee income more than 50%. (See table.1). It means that fee income had already larger than interest income. The source is come from foreign exchange transaction and derivative. In fee achieve, foreign banks like Citibank and HSBC, had already stable enough. Because, had many source, including from credit card or global cash management.

For private banks group, fee income had already high enough; many banks gain above 10%. Even not strong enough in derivative transaction, many private banks’ fee income are gained from credit card issuing or others financial products selling, like insurance and mutual funds, following financial services integration phenomenon.

Then, how is the tendency of fee income in the futures? Actually, there are still more that can be explored. From the credit card, for example. By price increase at once of telephone tariffs, electricity, and oil, then followed by increasing of others good and services price, surely credit card usage will be more numerous, both nominal even frequencies. The function as secondary reserves also more needed. Not stop the possibilities that card holder often over limit or late payment, these are fee income source that bank issuing are waiting for.

Table 1.

No.	Bank	2002		2001
		Billion Rp	% of total income	Billion Rp	% of total income
1.	Bank Mandiri	2.937	10,7%	1.266	5,2%
2.	Bank BNI	1.141	9,6%	1.297	12,6%
3.	Bank BRI	779	7,3%	567	6,6%
4.	Citibank	530	23,0%	419	18,0%
5.	Standard Charter	878	56,7%	354	32,4%
6.	HSBC	428	34,2% Keterangan: Bagi yang berminat untuk memiliki versi lengkap judul diatas dalam format Msword hubungi ke nomor: Hp/Wa. 0812 2701 6999 atau 0817 273 509. Skripsi Rp300rb, Tesis Rp500rb. Layanan ini bersifat sebagai referensi dan bahan pembelajaran. Kami tidak mendukung plagiatisme. Jika belum jelas, jangan ragu telepon kami :)	444	32,4%
7.	JP Morgan	136	50,9%	87	38,3%
8.	Bank of Amerika	47	32,2%	81	54,4%
9.	BCA	876	7,6%	721	6,9%
10.	BII	501	18,8%	399	13,7%
11.	Bank Panin	481	16,3%	204	9,6%
12.	Bank Danamon	453	8,0%	243	4,5%
13.	Bank Sumut	25	7,2%	19	8,2%
14.	Bank DKI	24	4,4%	20	4,9%
15.	BPD Jateng	15	2,6%	11	2,9%

Source: Info Bank, February 2003

The increasing presence of non-interest income at commercial banks has been widely documented and discussed in the industry press and regulatory publications (for example, Feldman and Schmidt, 1999). While it is well known that large banks and banks with specialized strategies (e.g., credit card banks, mortgage banks) rely more heavily on non-interest income than do small banks with traditional business strategies, there is little systematic understanding of why non-interest income varies across banks.

1.2. RESEARCH LIMITATION

Without some certain limitation, this research is too wide and complex, therefore the writer give limitations as follow:

1. This research is using Financial Statement on Bank Indonesia’s database (Commercial banks of consolidated balance sheet, income statement, and productive asset quality report) from the period of December 2000-December 2003. This research period was chosen with reason: in anticipation of this research was conduct, availability data in Bank Indonesia only toward December 2003.
2. The Banks chosen are from Corporate Bank (Bank Pemerintah), Foreign Exchange Private Bank (BUSN Devisa), and Foreign Bank. The reason of selecting those banks group as a sample of this study is because it had already represented the characteristic of commercial banks that it can expected to reflect the whole banking industries in Indonesia.

1.3. PROBLEM FORMULATION

Based on the background that are explained above, the problem statements developed in this study can be investigated as following questions:

“Which bank financial performances, bank characteristics, technological advances are most closely associated with increased non-interested income?”

1.4. RESEARCH OBJECTIVE

The objective of the research in this study are to answer the questions above, that is for knowing the impact of bank financial performances, bank characteristics, and technological advances to non-interested income.

1.5. RESEARCH BENEFITS

This study is expected to give benefits for:

1. Common Indonesian Banking specifically in reminds their role as fund intermediaries and reevaluates their policy in managing their fund policies.
2. Reader, as information that can be used for object consideration toward the next related research.
3. Researcher, specifically in deepen financial management knowledge especially fund management of bank in practice with applying theories that already get in the lecture.

1.6. OUTLINE

This study will be arranged as follow:

1. Chapter I Introduction. This chapter will explain about background, research objective, scope limitation, and benefit of the research.
2. Chapter II Literature Review and Hypothesis Development. This chapter will elaborate some theories and literature review concerning the research.
3. Chapter III Research Methodology. This chapter will explain research typology, technique to collect data, data collection, identification and variables used, development of hypothesis, and the statistical tools used to test the hypothesis.
4. Chapter IV Findings and Discussion. This chapter will explain description and data analysis, test of data, test of hypothesis and analysis of result.
5. Chapter V Conclusion, Limitation and Suggestion. This chapter will conclude the result of the research, comment, suggestion for further study.

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