Impact of Macroeconomic Factors on Financial Performance of Commercial Banks in Indonesia

Abstract

This study investigated the impact of macroeconomic factors on the financial performance of commercial banks in Indonesia. By analyzing a sample of Indonesian banks over a specified period, the research examines the relationships between bank profitability and key macroeconomic variables, such as interest rates, inflation, exchange rates, and economic growth. Employing literature review methodology, the study aimed to shed light on how these macroeconomic factors influence banks' financial performance and assess the implications for risk management, regulatory policies, and strategic decision-making. The study found that the findings of various empirical studies on the impact of macroeconomic factors on the financial performance of commercial banks highlight several key macroeconomic factors that significantly influence bank profitability and other financial performance indicators. These factors include interest rates, inflation, exchange rates, economic growth, and market competition. While the specific findings and magnitudes of the impacts may vary across different countries and regions, some common patterns and trends can be observed. Interest rates have been identified as a critical determinant of bank profitability. Studies have found that higher interest rates can negatively affect bank profitability, as they increase the cost of borrowing for banks, subsequently affecting their lending activities and overall profits. The study concludes that while the specific relationships and magnitudes of these impacts may vary across different countries and regions, understanding these interactions is essential for banks, regulators, and policymakers to make informed decisions and adopt effective strategies. Thus, commercial banks in Indonesia should closely monitor and manage their exposure to macroeconomic factors, such as interest rates, inflation, exchange rates, and economic growth, to maintain and improve their financial performance. Keywords: Macroeconomic factors interest rates, inflation, exchange rates, and economic growth