Economic Pressure on the Interest Margin of Banks in Indonesia

Abstract

Net Interest Margin (NIM) is a profitability ratio to compare interest-based income and total assets owned. This study analyzes economic conditions on the Net Interest Margin (NIM) of conventional banking in Indonesia. This study uses the Vector Error Correction Model method with monthly data from 2008 to 2020. The long-term results are only inflation, which does not affect, while all variables do not affect the short-term. The Impulse Response Function results show that the exchange rate positively shocks the Net Interest Margin while interest rates, gold prices, oil prices, and inflation negatively shock NIM. The Forecast Error Variance Decomposition results found that inflation gave the second-largest variation while interest rates provided the minor variation. Keywords:VECMNet Interest MarginInterest RatesInflationExchange RatesGold PricesOil Prices