Diversification, Profitability, and Bank Financial Stability in Indonesia

Covid-19 pandemic and the rapid growth of technology based non-bank financial institutions pose new challenges for the banking industry in Indonesia. One strategy that can be applied to deal with current conditions is to look for other income alternatives, by diversifying. This paper analyzes the relationship between income diversification, profitability, and bank financial stability. The study also examines how bank's profitability level affects the relationship between income diversification and bank financial stability. Using the fixed effect model as an estimator method, the results show that income diversification has a negative and significant impact on bank financial stability. Profitability has a positive and significant impact on bank financial stability. The results also indicate that profitability level has a negative and significant impact in affecting income diversification and bank financial stability relationship. The findings suggest that it is necessary to pay more attention to activities that become the main sources of bank's non-interest income because this can affect diversification and bank financial stability relationship. It's also suggest that banks with higher profitability level tend to carry out more diversification related activities compared to banks with lower profitability level.