9 Chapter II Literature Review II.1 Introduction The financial service industry has kept evolving which can be seen from the numerous previous study. Prior studies have studied both banking and fintech overall. This study will emphasize the effect of P2P lending on bank’s performance. Specifically, this research will investigate the effect of P2P loan disbursement and total asset on bank’s profitability and stability. II.2 Past Studies on Banking Performance Performance of banking can be evaluated by various measurements. The most common measurement is profitability since it evaluates how well-managed the bank is to generate money as the primary survival source (Mishkin, 2012). In evaluating a bank’s profit, Mishkin (2012) states that it can be measured using return on asset (ROA) and return on equity (ROE). By dividing net profit after tax by total assets, ROA provides insight into the efficiency of a bank’s management by indicating the average profit generated per dollar of assets. Slightly different, the ROE gives insight into how much the bank’s earnings are based on every dollar of shareholder’s equity investment. Like ROA calculation, the ROE is obtained by dividing the net profit after sales with equity capital. In previous studies, ROA and ROE as profitability measurements have been used by many researchers. For example, Olmo et al. (2021) used these measurements to study the effects of efficiency, market power, and sustainable banking practices in 48 countries on bank profitability. Using the generalized method of moment (GMM), they found that sustainable banking and bank efficiency increase the bank’s profitability. However, the market power is only increasing the profitability of traditional banks, not sustainable ones. Another example, still using ROA and ROE as profitability measurements, (Jigeer & Koroleva, 2023) study the internal and external determinants affecting China’s city commercial bank’s profitability. Using panel data regression, they found that the internal aspects that affect a city commercial bank’s profit are the bank’s total assets, 10 capital adequacy, credit quality, and operational efficiency, while the external ones are regional GDP and inflation. The last example of profitability measurement in the previous study is Le’s (2020) and Moudud-Ul-Huq’s (2020) research. These researches study the relationship between banks’ profitability and stability and the effects of competition among banks in BRICS countries on the bank’s profitability and risk-taking behavior. Le (2020) used ROE as a profitability proxy and found that profitability has a positive relationship with the bank’s stability. Differently, Moudud-Ul-Huq (2020) used net interest margin (NIM) as the bank’s profitability proxy and found that competition negatively affects the large bank’s stability and the small bank’s profitability. Another important measurement of a bank’s performance is stability. According to Amidu and Wolfe (2013), stability is important to competition in banking as it will minimize the bank’s risk. They studied banks in 55 emerging countries and used a few stability measurements, namely Z-score (ZSCORE), risk-adjusted ROA (RROA) and ROE (RROE), and non -performing loans (NPL). The ZSCORE used to understand the insolvency risk, while the NPL used to investigate loan portfolio risk. ZSCORE is quite common when a researcher wants to evaluate a bank’s stability as it used in many previous studies, such as in Le’s (2020) research. Moudud-Ul-Huq (2020) also used ZSCORE to study BRICS’s bank stability. He even adds non-performing loans to total loans (NPLTL) and stability efficiency as stability measurements. He found that less competition will increase bank stability due to declining credit risk. Similar to Amidu and Wolfe (2013) research, (T. T. Nguyen et al., 2021) studied the ASEAN bank’s stability using ZSCORE and RROA, as stability proxy, with additional measurement of risk-adjusted capital adequacy ratio (RCAR). They found that non-interest income and fee-based activity or trading income will decrease bank stability. II.3 Past Studies on P2P Lending Fintech in general is a fresh financial provider as it improves the current quality of financial service products such as lending, payments, money transfers, and 11 savings with technology innovation (Malika & Yousef, 2018). According to Almulla and Aljughaiman (2021), fintech has create the digital product of existing financial service such as digital payment and digital saving. Moreover, fintech firms also has crowdfunding, micro-lending, blockchain cryptocurrency, and wealth management as their innovative product. Peer-to-peer (P2P) lending is also one of the lending services offered by fintech firm. Anugerah and Indriani (2018) state that P2P lending differs from bank lending by examining how each lender can directly invest their funds in their selected borrowers using an online platform. In addition to this distinction, P2P and banking differ in terms of their loan requirements. According to information provided by the Indonesia Financial Service Authority (OJK) regarding consumer protection, the borrower is not required to provide collateral in order to borrow through P2P lending. However, the borrower's interest rate is significantly greater than the bank's. Nonetheless, P2P has the advantage of simple accessibility, as everything can be done via an online platform since the P2P business model implementation is technology-reliant. The P2P lending ease of access also explained as customer-centric approach (Pousttchi and Dehnert, 2018; Puschmann and Alt, 2016). Despite the advantage and advancement of the P2P lending, in running the business they are also exposed to the risk. The prior study of P2P lending have discuss the default risk of the platform. The main focuses were the factors in general and macroeconomic factors that trigger P2P lending default (Nigmonov et al., 2022; Yoon et al., 2019), the determinant for P2P loan default (Xu et al., 2021), information disclosure impact (Wang et al., 2021), and methods comparison to measure P2P borrower’s credit risk (Zhou et al., 2021). Yoon et al. (2019) have investigate various factors related to the default risks of online P2P platforms using the data from Chinese online P2P lending. They found that the default risk is increase as the competition became more tight, but could reduce with more P2P experiences and policies implementation. They also explained that 12 the default risk could be reduced using two risk management tools, risk reverse requirement and custodian fund.