The Effects of Credit Risk, Liquidity, and Capital on Profitability of Digital Banks in Indonesia For The Period 2021-2025
Abstract
This study empirically examines the influence of credit risk, liquidity, and capital adequacy on the profitability of digital banks operating in Indonesia throughout the 2021–2025 period. Employing a quantitative research design with a descriptive approach, this investigation utilizes secondary data derived from quarterly audited financial statements of eight digital banks registered under the supervision of the Financial Services Authority, yielding a total of 160 observational units. The panel data regression technique is applied with the Random Effect Model selected as the most appropriate estimation framework following the Chow, Hausman, and Lagrange Multiplier specification tests. To correct for heteroscedasticity, the model is re-estimated utilizing White cross-section standard errors, thereby ensuring the robustness of the statistical inferences. The empirical findings reveal that, when considered jointly, credit risk, liquidity, and capital adequacy exert a statistically significant influence on profitability. However, at the partial level, only liquidity, as proxied by the Loan to Deposit Ratio, demonstrates a positive and statistically significant impact on Return on Assets. In contrast, credit risk, measured by the Non-Performing Loan ratio, and capital adequacy, represented by the Capital Adequacy Ratio, exhibit no statistically significant effects on profitability. These results substantiate that the traditional intermediation function continues to serve as the fundamental driver of profitability within the digital banking sector. Meanwhile, credit risk management and capital buffers function primarily as prudential instruments for risk mitigation rather than as direct determinants of earnings performance. This study contributes to the theoretical extension of the Financial Intermediation Theory by contextualizing its applicability within the rapidly evolving landscape of digital banking in emerging economies.