Abstract
This study aims to analyze the effect of the financial health of Indonesian commercial banks on financial performance with good corporate governance as an intervening variable. This study utilizes the risk-based bank rating (RBBR) method with secondary data by examining annual reports of 41 commercial banks taken as samples for the period from 2014 to 2019. The ratios used in this study are Non-Performing Loans (NPL), Loan Deposit Ratio (LDR), Net Interest Margin (NIM), and Operating Efficiency Ratio (OER), Capital Adequacy Ratio (CAR), Return on Assets (ROA) and Good Corporate Governance (GCG). The results showed that NIM had a direct positive and significant effect on ROA, while OER had a negative and significant effect on ROA, as hypothesized. Direct testing of GCG shows a negative and significant effect of NPL and OER, as well as a positive and significant effect of NIM. Furthermore, indirect testing with intervening variables shows that GCG is able to mediate the relationship between NPL and OER on the financial performance of conventional banks in Indonesia. In addition, GCG is also empirically proven to strengthen the positive and significant effect of NIM on ROA. This finding underscores the importance of good corporate governance in improving the financial health of commercial banks in Indonesia. In addition, the results theoretically would imply for the relevance of investigations regarding governance mechanisms and moral ethics as the domains of strategic issues of corporate governance.
Public interest statement
Good Corporate Governance has long been an interesting issue for public companies. Publicly listed commercial banks, in this regard, have a strategic responsibility in managing their good corporate governance to gain legitimacy and credibility and to balance the various demands between regulation, and the demands of shareholders and the public. This study presents an investigation of the mediating role of good corporate governance in the commercial banking industry in Indonesia. By using the latest data, the results evaluate how the internal mechanisms in Indonesian commercial banks regulate risk management by utilizing good corporate governance in order to improve their financial performance. The results encourage the need to strengthen the governance mechanisms that have been adopted so far in Indonesia, and theoretically confirm the governance mechanism as an important strategic domain in risk management in commercial banks in Indonesia.
Acknowledgements
The authors would like to thank Universitas Nasional, Jakarta for research support. Sincere thanks go to the three anonymous reviewers for their insightful comments in various substantial and technical issues examined in this article. The authors are indebted to Supriono Bangetayu for his helpful assistance in editing the manuscript and administering the data during the study. The authors, however, bears full responsibility for the paper.
Disclosure statement
No potential conflict of interest was reported by the author(s).
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Notes on contributors
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Andini Nurwulandari
Andini Nurwulandari is a senior lecturer at the Management Program, Graduate School, Universitas Nasional, Jakarta. Her research interests include financial management, investment, and corporate action. Currently, her research has focused on the good governance of commercial banks.
Hasanudin Hasanudin
Hasanudin Hasanudin is a senior lecturer at the Management Program, Graduate School, Universitas Nasional, Jakarta. His research interests include financial management, investment portfolio and asset allocation. His research focuses on the relationship between pension fund management and various corporate financial performances.
Bambang Subiyanto
Bambang Subiyanto is a senior lecturer in the Accounting program, Universitas Nasional, Jakarta. His research interests include auditing and accounting. His recent research has focused on volume, the frequency of trading activity of public companies during Covid-19.
Yulia Catur Pratiwi
Yulia Catur Pratiwi is a lecturer at the Management Program, Graduate School, Universitas Nasional, Jakarta. Her research interests include financial management, banking performance and good corporate governance