THE EFFECT OF P2P LENDING DISBURSED LOAN AND TOTAL ASSETS ON BANKING PERFORMANCE AND STABILITY THESIS In partial fulfilment of the requirements for the Degree of Master of Science in Management from Institut Teknologi Bandung By AQILLA DHIANIR RAHMAN PANCA Student ID: 29021016 (Master Program of Science in Management) INSTITUT TEKNOLOGI BANDUNG June 2023 i ABSTRACT THE EFFECT OF P2P LENDING DISBURSED LOAN AND TOTAL ASSETS ON BANKING PERFORMANCE AND STABILITY By Aqilla Dhianir Rahman Panca Student ID: 29021016 (Master Program of Science in Management) Technology development has improved many human activities; the financial sector is no exception. Financial service has gone through innovative technology development that makes human necessities easier. One of the top products is peer- to-peer (P2P) lending. P2P lending is present to create easier funding channelling. Borrowers only fill the credit requirement by online platform; lenders could choose which borrower they want to lend their money to. This easy-to-use of P2P lending might lead them to become the competitor for the banking industry as the traditional financial service provider that existed before P2P lending appeared. However, the competition in the banking industry is not quite clear as it developed two competition theories: fragility-competition and stability competition. Fragility-competition suggests that as the competition level increases, it negatively affects bank performance. In contrast, the stability-competition theory suggests that competition will enhance a bank’s performance. While in consumer and disruptive innovation theory, it suggests that new service provider with technological adaptation could replace the old provider if they could fulfil consumer demand. This unclear direction of competition between P2P lending and banking lead this research to understand the actual condition. Using panel data regression, this research analyzed 98 banks with return on asset (ROA), return on equity (ROE) as profitability proxy, and loan-loss provision (LLP), Z- score as stability proxy. This study found that P2P loans disbursed and their total assets negatively affect bank profitability and stability. The additional test also supports this finding. This study tries to understand profitability and stability as part of a bank’s performance. Moreover, this study also incorporates different P2P lending measurements that more describe its business transaction, unlike previous studies that only use the number of P2P lending and fintech level. However, this research only studies the effect using the time horizon from December 2018 to July 2020 and aggregates data due to data availability. Thus, the future search could investigate more extended time observation, differentiating region-based transactions, and using additional proxies. Keywords: Bank’s Performance, P2P lending, Fragility-competition, Consumer Theory ii iii ABSTRAK PENGARUH PINJAMAN YANG DISALURKAN DAN TOTAL ASET P2P LENDING TERHADAP KINERJA DAN STABILITAS PERBANKAN Oleh Aqilla Dhianir Rahman Panca Student ID: 29021016 (Program Studi Magister Sains Manajemen) Perkembangan teknologi telah meningkatkan banyak aktivitas manusia, tidak terkecuali di sektor keuangan. Layanan keuangan telah mengalami perkembangan teknologi yang inovatif yang membuat kebutuhan manusia menjadi lebih mudah. Salah satu produk unggulannya adalah peer-to-peer (P2P) lending. P2P lending hadir untuk menciptakan penyaluran dana yang lebih mudah. Peminjam hanya mengisi persyaratan kredit melalui platform online, sedangkan pemberi pinjaman dapat memilih peminjam mana yang ingin mereka pinjamkan uangnya. Kemudahan yang ditawarkan oleh P2P lending ini bisa jadi membuat mereka menjadi pesaing industri perbankan sebagai penyedia jasa keuangan tradisional yang sudah ada sebelum P2P lending muncul. Namun, persaingan di industri perbankan tidak begitu jelas karena ada dua teori persaingan yang berkembang: fragility- competition dan stability competition. Fragility-competition menyatakan bahwa semakin tinggi tingkat persaingan, maka akan berdampak negatif terhadap kinerja bank. Sebaliknya, teori kompetisi stabilitas menunjukkan bahwa kompetisi akan meningkatkan kinerja bank. Sementara dalam teori inovasi konsumen dan disruptif, menunjukkan bahwa penyedia layanan baru dengan adaptasi teknologi dapat menggantikan penyedia layanan lama jika mereka dapat memenuhi permintaan konsumen. Ketidakjelasan arah persaingan antara P2P lending dan perbankan mendorong penelitian ini untuk memahami kondisi yang sebenarnya. Dengan menggunakan regresi data panel, penelitian ini menganalisis 98 bank dengan return on asset (ROA), return on equity (ROE) sebagai proksi profitabilitas, dan loan-loss provision (LLP), Z-score sebagai proksi stabilitas. Studi ini menemukan bahwa pinjaman P2P yang disalurkan dan total aset bank berpengaruh negatif terhadap profitabilitas dan stabilitas bank. Uji tambahan juga mendukung temuan ini. Penelitian ini mencoba memahami profitabilitas dan stabilitas sebagai bagian dari kinerja bank. Selain itu, penelitian ini juga menggabungkan pengukuran P2P lending yang berbeda yang lebih menggambarkan transaksi bisnisnya, tidak seperti penelitian sebelumnya yang hanya menggunakan jumlah P2P lending dan tingkat fintech. Namun, penelitian ini hanya mempelajari pengaruhnya dengan menggunakan horison waktu dari Desember 2018 hingga Juli 2020 dan mengagregasi data karena ketersediaan data. Oleh karena itu, penelitian selanjutnya dapat menyelidiki pengamatan waktu yang lebih panjang, membedakan transaksi berdasarkan wilayah, dan menggunakan proksi tambahan. Keywords: Kinerja bank, P2P lending, Fragility-competition, Teori Konsumer iv v THE EFFECT OF P2P LENDING DISBURSED LOAN AND TOTAL ASSETS ON BANKING PERFORMANCE AND STABILITY HALAMAN PENGESAHAN By Aqilla Dhianir Rahman Panca Student ID: 29021016 Master Program of Science in Management Institut Teknologi Bandung Approved August 4, 2023 Supervisor ______________________ Oktofa Yudha Sudrajad, S.T., M.S.M, Ph. D. vi vii THE GUIDANCE FOR USING THE THESIS Unpublished masters’ thesis is registered and available in the Library of Bandung Institut of Technology, and is open for public, provided that the author owns the copyright in accordance with the intellectual property rights that are applicable in the Library of Institut Teknologi Bandung. Bibliographical references are allowed to be use in a limited manner, however the citation and summarization can only be proceed upon the author’s permission and must include the scientific norm of stating this thesis as the source. This thesis has to be cited as: Panca, ADR. (2023): The Effect of P2P Lending Loan Disbursed and Total Assets on Banking Performance and Stability, Masters’ Thesis, Institut Teknologi Bandung. Reproduction or publication of parts or whole of the thesis must be under the consent of the Head of Graduate School, Bandung Institute of Technology. viii ix HALAMAN PERUNTUKAN This thesis is dedicated to my beloved parents, Alm. Ayah Panca Yusyahnonta and Ibu Widya Irsyad, and my lovely sister, Amira Qistina Panca, for the countless prayers, love, and all the support that you always give. I truly grateful for having you in my life. x xi STATEMENT OF AUTHORSHIP I hereby declare that I am the sole author of this thesis and to the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made. I further declare that this thesis has not been previously submitted to obtain a degree at this or any other higher education institution. Bandung, 27 June 2023 Aqilla Dhianir Rahman Panca 29021016.