Productive Credit Structure and Banking Sector Risk: Evidence from an Emerging Economy

Abstract

This study aims to analyze the relationship between Operational Costs to Operating Income (BOPO) and Return on Assets (ROA) in Rural Banks (Bank Perkreditan Rakyat – BPR) in Indonesia. The study uses a quantitative approach by employing monthly time-series data from January 2019 to January 2022, obtained from the Indonesian Banking Statistics (Statistik Perbankan Indonesia) published by the Financial Services Authority (Otoritas Jasa Keuangan – OJK). The analysis is conducted using simple linear regression to determine the effect of BOPO on ROA. Considering that the data are time-series in nature, the estimation results are also corrected using the Newey–West method to address possible autocorrelation problems. The regression results show that BOPO has a negative and significant relationship with ROA. This indicates that an increase in the level of operational inefficiency, as reflected by higher operational costs relative to operating income, tends to reduce the profitability level of Rural Banks. The results of this study emphasize the importance of maintaining operational efficiency as a determinant of profitability for Rural Banks. Continuous efforts to improve cost management and operational effectiveness are necessary to ensure the sustainability of profitability in the Rural Bank sector.