THE EFFECT OF BANKING PERFORMANCE ON INDONESIA’S ECONOMIC GROWTH: THE CAMEL APPROACH

Abstract

Economic growth, as measured by Gross Domestic Product (GDP), is an indicator of a country’s welfare and progress. Bank Indonesia as the party responsible for monetary policy strives to build synergy between financial markets and economic growth. The banking sector plays a prominent role in the country’s economic growth. This study analyzed the effect of banking performance on economic growth using the CAMEL approach. Collecting data from 39 banks listed on the Indonesia Stock Exchange from 2015 to 2020, this study employed the dynamic panel data regression with the GMM approach for data analysis. The results of the study show that banking performance as represented by the CAMEL approach affects economic growth. The CAMEL approach in this study consists of the Capital Adequacy Ratio (CAR), Non-Performing Loan (NPL), Net Interest Margin (NIM), Return on Asset (ROA), and Loan to Deposit Ratio (LDR), each of which has a distinct effect. CAR, NIM, and ROA show a significant positive effect on economic growth. On the other hand, the NPL and LDR show a significant negative effect on economic growth.

Keywords

• financial performance
• economic growth
• camel
• endogenous growth theory