INTEREST RATE RISK OF BANKING SECTOR: THE EFFECT OF MATURITY GAP ON NET INTEREST INCOME IN INDONESIA

Abstract

Purpose - This study aims to examine how the interest rate risk management that has been reflected in banks’ maturity gaps affect the net interest income (NII).

Methodology - The population in this study is all conventional commercial (non-Sharia) banks in Indonesia as many as 99 banks. Of the 99 banks, 57 banks were selected as the sample of in the study. Determination of the sample is based on these criteria: the availability of the bank's annual report containing financial statements providing data about the descriptions of interest rate risk management, which also provides complete data about bank's RSA and RSL from 2013 - 2017. There are five years of the research period, so 285 unit observations are used in the analysis. The study employs multiple regression analysis with panel data. Net interest income is derived from the difference between interest income and interest expense. The maturity gap is calculated as the difference between RSA and Risk RSL. The study uses a dummy variable of IRS, LDR, net NPL and ownership status of banks.

Findings - The results of the study show that maturity gap has a negative effect on NII and banks with positive gaps have higher NII than banks with negative gaps. These results imply that when the interest rate decreases, the widened positive gap will lower NII.

Conclusion - The conclusion of the research is that in conditions of declining interest rates, the more positive gap between RSA and RSL has decreased banks’ NII. The practical implication of the results is that banks need to think about lowering the RSA by means of managing their assets, such as banks need to buy long-term securities, extend the loan maturity, and change the interest rate from the floating rate to a fixed rate. In terms of management liabilities, banks need to think about increasing RSL by giving premium interest rates for deposits with a maturity of less than one year, and by borrowing funds at fair interest rates.

Keywords

• Indonesian banks,interest rate risk,interest rate sensitivity,maturity gap,net interest income

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