BANK RESERVE REQUIREMENT, DIGITALIZATION, AND PROFITABILITY IN INDONESIA BANKING INDUSTRY

The study investigates the impacts of central banks’ policies along with the effects of digitalization and macroeconomics on the profitability of Indonesian banks using dynamic panel data from the period 2010–2022. The System Generalized Method of Moments (GMM) analysis reveals that profitability of the past significantly influences present performance due to the presence of strong profit persistence among the banks. The analysis finds that the reserve requirements lower profitability while digitalization raises profitability, thus reflecting the necessity of financial innovations. The analysis reveals that banks that have a higher ratio of capital adequacy ratio (CAR) and loan-to-deposit ratio (LDR) have improved profitability levels that reflect the necessity of strong financial fundamentals. The research shows that exchange rate (ER) depreciation leads to reduced profitability but moderate inflation levels have a positive effect on profitability. The research demonstrates that balanced monetary policy together with digital transformation and stable macroeconomic conditions create essential conditions for bank performance. The study recommends that governments should support digital infrastructure development while exercising careful monetary tightening and improve their foreign exchange risk management systems. The research demonstrates how policy and technology work together to affect financial sector performance.

Keywords: Reserve Requirement, Digitalization, Return on Asset, Banks, Panel GMM.

JEL Classifications: E20, E44, E58