Keywords:
autoregressive lag model
crude oil price
inflation
profitability

  • Abstract

    Profitability is a crucial performance indicator for banks worldwide, as they function as intermediaries between savers and borrowers. Many factors, both internal and external to the bank, can affect profitability, leading to fluctuations in its value. Therefore, this study aims to examine the effect of external factors, such as crude oil prices and inflation, on the profitability of government banks in Indonesia. The detailed objectives of the study are: (1a) to test the long-term effect of crude oil prices on bank profitability, (1b) to test the short-term effect of crude oil prices on bank profitability, (2a) to test the long-term effect of inflation on bank profitability, and (2b) to test the short-term effect of inflation on bank profitability. To achieve this aim, a sample, which constituted monthly time series data spanning from January 2017 to April 2022, so there is 220 observations or numbers of research sample data. The sample data was analyzed using an autoregressive distributed lag model or ARDL model. All time series of crude oil prices, inflation and return on assets (a proxy for profitability) are stationary at the first difference. Furthermore, crude oil prices and inflation are cointegrated with bank profitability. The obtained results showed that (1a) Crude oil prices positively and significantly affect bank profitability in the long term, (1b) Crude oil prices do not affect bank profitability in the short term, (2a) inflation positively and significantly affects bank profitability in the long term, and (2b) inflation does not affect bank profitability in the short term. Furthermore, for every 1% increase in crude oil prices, bank profitability increases by 0.161509%, and for every 1% increase in inflation, bank profitability increases by 0.336252%.

  • References

    1. Abidillah, A. F., & Ryandono, M. N. H. (2019). Do macroeconomics variables affect conventional and Islamic banking profitability?. AFEBI Islamic Finance and Economic Review, 4(2), 101-114. https://journal.afebi.org/index.php/aifer/article/view/363.
    2. Adam, P., Rianse, U., Cahyono, E., & Rahim, M. (2015). Modeling of the Dynamics Relationship between World crrude Oil Prices and the Stock Market in Indonesia. International Journal of Energy Economics and Policy, 5(2), 550-557.
    3. Al-Harthy, L. S. H., Jalagat, R. C., & Sayari, K. (2021). Determinants of bank profitability during oil price decline: Evidence from selected banks in Oman. International Journal of Research Business and Social Science, 10(18), 200-217. https://doi.org/10.20525/ijrbs.v10i8.1519.
    4. Ali, R. A. H. (2017). The Effect of crude oil price on Islamic and conventional banks’ profitability case study: OPEC Countries (Unpublished Thesis). Eastern Mediterranean University, Gazimağusa, North Cyprus. http://i-rep.emu.edu.tr:8080/xmlui/handle/11129/4299.
    5. Banda, L. G. (2021). Determinants of commercial banks’ performance in Malawi: An autoregressive distributed lag (ARDL) approach. Journal of Economics and International Finance, 13(4), 163-174. https://doi.org/10.5897/JEIF2021.1142.
    6. Brown-Collier, E., & Smith, W. D. (1984). The wealth effect: Pigou, Patinkin and supply-side economics. Eastern Economic Journal, 10(4), 380-388. https://www.jstor.org/stable/40324930.
    7. Brown. R. L., Durbin., & Evans, J. M. (1975). Techniques for testing the consistency of regression relations over time. Journal of the Royal Statistical Society. Series B (Methodological), 37(2), 149-192. https://doi.org/10.1111/j.2517-6161.1975.tb01532.x.
    8. Chukwuogor, C., Anoruo, E., & Ndu, I. (2021). An empirical analysis of the determinants of the U.S. banks’ profitability. Banks and Bank Systems, 16(4), 209-217. http://dx.doi.org/10.21511/bbs.16(4).2021.17.
    9. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Assosiation, 74, 427-443. https://doi.org/10.1080/01621459.1979.10482531 .
    10. Dogrul, H.G., & Soytas, U. (2010). Relationship between oil prices, ınterest rate, and unemployment: Evidence from emerging market. Energy Economic, 32(6), 1523-1528. https://doi.org/10.1016/j.eneco.2010.09.005.
    11. Farkasdi, S., Septiawan, B., & Algivari, E.S. (2021). Determinant of commercial banks profitability: Evidence from Germany. Jurnal Riset Akuntansi Kontemporer, 13(2), 82-88. https://doi.org/10.23969/jrak.v13i2.4500.
    12. Flamini, V., McDonald, C., & Schumacher, L. (2009). The Determinants of Commercial Bank Profitability in Sub-Saharan Africa. IMF Working Paper No. WP/09/15, 1-30. https://www.imf.org/external/pubs/ft/wp/2009/wp0915.pdf.
    13. Guru, B.K., Staunton, J., & Balashanmugam, B. (2002). Determinants of commercial bank profitability in Malaysia. 12th Annual Australian Finance and Banking Conference, Sydney, 16-17. http://web.usm.my/aamj/5.2.2000/5-2-1.pdf.
    14. Hall, M. (2023). How interest rate changes affect the profitability of banking. New York: Investopedia. https://www.investopedia.com/ask/answers/041015/how-do-interest-rate-changes-affect-profitability-banking-sector.asp
    15. Hancock, D. (1985). Bank profitability, interest Rates, and monetary pollcy. Journal of Money, Credit and Banking, 17(2), 189-202. https://www.jstor.org/stable/1992333.
    16. Hasanov, F. J., Bayramli, N., & Al-Musehel, N. (2018).. Bank-specific and macroeconomic determinants of bank profitability: Evidence from an oil-dependent economy. International Journal of Financial Studies, 6(78), 1-21. https://doi.org/10.3390/ijfs6030078.
    17. Hasan, M. S. A., Manurung, A. H., & Usman, B. (2020). Determinants of bank profitability with size as moderating variable. Journal of Applied Finance and Banking, 10(1), 153-166. http://eprints.binus.ac.id/36348.
    18. Heij, C, Boer, Frances, P. H, Kloek, T, & Dijk, H. K. (2004). Econometric methods with application in Business and economics. Clareendon : Oxford University Press.
    19. Hesse, H., & Poghosyan, T. (2016). Oil Prices and bank profitability: Evidence from major oil-exporting countries in the Middle East and North Africa. In: Gevorkyan, A. V, Canuto, O (eds.), Financial deepening and post-crisis development in Emerging Markets (247-270). New York: Palgrave Macmillan.
    20. Jeevitha-R., Mathew, B., & Shradha, K. K. (2019). Impact of inflation on bank’s profitability: A study on select banks profitability. Journal of Emerging Technologies and Innovative Research, 9(8), 38-44. http://www.jetir.org/papers/JETIR06005.pdf.
    21. Johan, S. (2021). Determinant of banking industry: An empirical research of Indonesia financial institutions. Ekuitas: Jurnal Ekonomi dan Keuangan, 5(2), 244 – 262. https://doi.org/10.24034/j25485024.y2021.v5.i2.4666.
    22. Katırcıoglu, S., Ozatac, N., & Taspınar, N. (2018). The role of oil prices, growth and inflation in bank profitability. The Service Industries Journal, 40. https://doi.org/10.1080/02642069.2018.1460359.
    23. Killins, R. N., & Mollick, A. V. (2020). Performance of Canadian banks and oil price movements. Research in International Business and Finance, 54(2020) 101258. https://doi.org/10.1016/j.ribaf.2020.101258
    24. Kryeziu, N., & Hoxha, E. (2021). Factors affecting on bank’s profitability: the case of 19 Euro-Area countries. Jurnal Perspektif Pembiayaan dan Pembangunan Daerah, 9(1), 1-8. https://doi.org/10.22437/ppd.v9i1.12165
    25. Lau, M. M., Cheung, R., Lam, A, Y. C., & Chu, Y. T. (2013). Measuring service quality in the banking industry. Contemporary Management Research, 9(3), 263-282. https://doi.org/10.7903/cmr.11060.
    26. Liberto, D. (2021). The wealth effect: definition and example. New York: Investopedia. https://www.investopedia.com/terms/w/wealtheffect.asp#:~:text=What%20is%20The%20Wealth%20Effect,investment%20portfolios%20increase%20in%20value.
    27. Malik, A. F., Khan, S., Khan., M. I., & Khan, F. (2014). Interest rate and its effect on Bank’s profitability. Journal of Applied Environmental and Biological Sciences, 4(8S), 225-229.
    28. Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance, 16, 1173-1178. https://doi.org/10.1016/0378-4266(92)90065-8.
    29. Nguyen, H. P. (2018). Profitability of Vietnamese banks under competitive pressure. Emerging Markets Finance and Trade, 55(9), 2004-2021. https://doi.org/10.1080/1540496X.2018.1511977.
    30. Nguyen, T. P. T., & Nguyen, T. Q. A. (2024). Factors affecting the profitability of listed agricultural companies in the Vietnamese stock market. Multidisciplinary Science Journal, 6(7), 2024125. https://doi.org/10.31893/multiscience.2024125.
    31. Nunes, P. M., Serrasqueiro, Z. S., & Leitão, J. (2010). Are there nonlinear relationships between the profitability of Portuguese service SME and its specific determinants?. The Service Industries Journal, 30(8), 1313–1341. https://doi.org/10.1080/02642060802398853.
    32. Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237–252. https://www.econjournals.com/index.php/ijefi/article/view/334.
    33. Ozili, P. K. (2015). Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria. Research Journal of Finance and Accounting, 6(2), 124-131. https://www.iiste.org/Journals/index.php/RJFA/article/view/19184.
    34. Ozturk, I., & Acaravci, A. (2010). The causal relationship between energy consumption and GDP in Albania, Bulgaria, Hungary and Romania: Evidence from ARDL bound testing approach. Applied Energy, 87(6), 1938-1943. https://doi.org/10.1016/j.apenergy.2009.10.010.
    35. Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed-lag modelling Approach to Cointegration Analysis, In: S. Strom (Eds.), Econometrics and economic theory in the 20th century: the Ragnar Frisc h Centennial Symposium (371-413). Cambridge: Cambridge University Press.
    36. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 162, 89-326. https://doi.org/10.1002/jae.616.
    37. Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518 – 524. https://doi.org/10.1016/S2212-5671(15)00104-5.
    38. Pigou, A. C. (1943). The classical stationary state. Economic Journal, 53, 343-351.
    39. Ravinthirakumaran, K., Selvanathan, E. A., Selvanathan, S., & Singh, T. (2015). Determinants of foreign direct investment in Sri Lanka. South Asia Economic Journal, 16(2), 233–256. https://doi.org/10.1177/13915614155984.
    40. Rahman. M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh. International Journal of Business and Management, 10(8), 135-150. https://doi.org/10.5539/ijbm.v10n8p135.
    41. Saif-Alyousfi, A. Y. H., Saha, A., Md-Rus, R., & Taufil-Mohd. (2021). Do oil and gas price shocks have an impact on bank performance?. Journal of Commodity Markets, 22, June 2021, 100147. https://doi.org/10.1016/j.jcomm.2020.100147
    42. Samuelson, P. (1945). The effect of interest rate increases on the banking system. American Economic Review, 35, 16-27. https://www.jstor.org/stable/1810106
    43. Sufian, F. (2009). Determinants of bank profitability in a Developing Economy: Empirical evidence from the China banking sector. Journal of Asia-Pacific Business, 10, 281–307. https://doi.org/10.1080/10599230903340205
    44. Sufian, F. (2012). Determinants of bank profitability in developing economies: empirical evidence from the South Asian banking sectors. Contemporary South Asia, 20(3), 375–399. https://doi.org/10.1080/09584935.2012.696089
    45. Sufian, F., & Habibullah, M. S. (2009). Determinant of bank profitability in developing economy: Empirical evidence from Bangladesh. Journal of Business Economics and Management, 10(3), 207-217. https://doi.org/10.1080/10599230903340205.
    46. Tan, A. Y., & Floros, C. (2012). Bank profitability and inflation: the case of China. Journal of Economic Studies, 39 (6), 675-696. https://doi.org/10.1108/01443581211274610.
    47. Team, W. (2023). Real Balance effect. Mumbai: Wallstreetmojo. https://www.wallstreetmojo.com/real-balance-effect/
    48. Wang, Y., Wu, C., & Yang, L. (2013). Oil price shocks and stock market activities: evidence from oil-importing and oil-exporting countries. Journal of Comparative Economics, 41, 1220-1238. https://doi.org/10.1016/j.jce.2012.12.004.
    49. Zaccheaus, O. D., & Ajuwon, O. S. (2019). Oil price dynamics and the Nigerian Banks Profitability. The Journal of developing Areas, 53(2), 91-107. https://muse.jhu.edu/article/702998.
Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Copyright (c) 2025 The Authors

How to cite

Muthalib, D. A., Muthalib, A. A., Adam, P., Azis, M. I., Nur, M., Makkulau, A. R., Tambunan, R., Hakim, A., Asraf, & Putera, A. (2025). The effect of crude oil prices and inflation on the profitability of government banks in Indonesia. Multidisciplinary Science Journal, 8(1), 2026047. https://doi.org/10.31893/multiscience.2026047
Crossref
Scopus
Google Scholar
Europe PMC
  • Article viewed - 175
  • PDF downloaded - 75