THE IMPACT OF MONETARY POLICY ON THE PROFITABILITY OF BANKING IN INDONESIA
Keywords:
Impact Of Monetary Policy, Profitability, Banking, IndonesiaAbstract
The study addresses the impact of monetary policy on the profitability of banking in Indonesia, highlighting the critical influence of interest rate adjustments and economic activity. Changes in interest rates directly affect banks' funding costs and lending activities, while overall economic conditions shape loan demand and asset quality. This research employs a descriptive qualitative method, utilizing in-depth interviews with banking experts, policymakers, and financial practitioners, as well as analyzing official documents and academic publications. Data analysis is conducted using thematic analysis techniques to identify relevant patterns and themes. The findings reveal that higher interest rates increase banks' operational costs and suppress credit demand, negatively impacting profitability. Conversely, lower interest rates reduce funding costs and boost lending activities, enhancing profitability. Additionally, accommodative monetary policy reduces non-performing loans (NPLs) by easing borrowers' debt burdens, while tight policy increases NPLs due to higher debt servicing costs. The net interest margin (NIM) is compressed in low-interest-rate environments but improves with stable or rising rates. Effective regulatory measures and positive market sentiment further influence banks' resilience and profitability in response to monetary policy changes.
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