The Increase of Foreign Ownership and its Impact to the Performance, Competition & Risk in Indonesian Banking Industry

Abstract

The foreign ownership in Indonesian banking has increased dramatically after deregulation in 1998 following the severe economic crisis. A bank now can have foreign ownership up to 99%. This phenomenon has been responded with pros and cons. This study aims to investigate the impact of increasing foreign ownership to the performance, competition and short-term risk in Indonesian banking industry. This study uses financial report of 115 commercial banks over period of six years. Foreign bank is proven to be superior compare to domestic banks in terms of profitability and cost-efficiency. At the industry-level, results of this study reveal that increasing foreign ownership reduces profitability, increases competition and risk.

Keywords: Banks, Foreign Ownership, Performance

JEL Classification: G20, G21, G32