What Drives Banking Risk? Evidence from People’s Credit Banks in an Emerging Economy

Abstract

This study examines the determinants of banking risk in People’s Credit Banks (Bank Perkreditan Rakyat/BPR) in North Sumatra, Indonesia. The research aims to analyze the influence of macroeconomic variables on banking risk, proxied by total credit disbursement. The study uses panel data from 53 rural banks during 2015–2024 and applies panel data regression with a Random Effects Model (REM). The independent variables include inflation, interest rates, exchange rates, Gross Regional Domestic Product (GRDP), and the Composite Stock Price Index (IHSG). The findings reveal that interest rates have a negative and significant effect on credit disbursement, indicating that tighter monetary policy reduces lending activity. Conversely, exchange rates and regional economic growth positively and significantly affect lending expansion. Meanwhile, inflation and stock market performance do not significantly influence lending behavior in rural banks. The results imply that macroeconomic stability and regional economic growth are important factors in maintaining the resilience and sustainability of rural banking institutions, particularly in supporting effective financial intermediation in developing economies.