P2P lending: how does it affect Indonesian bank’s profitability?

Purpose The emergence of peer-to-peer (P2P) lending in Indonesia is expected to increase financial inclusion by allowing more individuals to access formal financial services. Even with its rapid development, only a few studies have empirically investigated its impact on Indonesian banking profitability. This study aims to investigate the effect of liquidity and credit risk on the profitability of Indonesian conventional banks before and after (P2P) lending and whether P2P lending weakens or strengthens the impact. Design/methodology/approach This study uses data from Indonesian conventional banks listed on the Indonesian Stock Exchange. The data are analyzed using a dynamic panel data model of the system generalized method of moments (SYS-GMM) and moderated regression analysis. Findings The results indicate that credit risk positively affects banks' profitability. P2P lending significantly weakens the impact of credit risk on banks’ profitability. Research limitations/implications The P2P lending is measured as a dummy variable since we do not have access to a higher measurement scale data of P2P lending in Indonesia. Practical implications The findings indicate that the intensive competition after the presence of P2P lending put pressure on banks to implement risk management better. This implies that banks should practice sound risk management to maintain their profitability, especially in responding to technology-driven increased competition from P2P lending providers. Originality/value This is the first study that focuses on banks' liquidity and credit risk after the presence of P2P lending and the enactment of the bank prudential risk management regulation in Indonesia.