The Role of Green Credit and Competition in Shaping Bank Profitability: Cross Country Evidence from Indonesia and China

Abstract

This research study investigated factors influencing the profitability of banks in Indonesia and China, with special emphasis on green credit policy, competition, and structural attributes. An examination of 43 banks in Indonesia and 19 banks in China between the years 2018-2022 used the Lerner Index to gauge competitive pressure and assessed profitability through ROA, ROE, and NIM. The key results show a mixed effect of green credit: it negatively affects ROA and ROE but positively affects NIM due to higher spreads from green finance. Competition among banks positively influences ROE from the perspective of efficiency of operations. The size of banks has a dual-fold influence: it benefits NIM through economies of scale but may also damage ROE due to inefficiency. The paper connects sustainable finance with competitive banking, providing insight into policymakers and practitioners. Policymakers must then formulate regulations for green finances without hurting competition and market stability. Industry players may utilize these results in strategizing for the interest of profit together with sustainability. The implications here are that general policies will instead be tailored in favor of green issues if those policies do not interfere with banks' proper functioning; banks become more operationally efficient and seek businesses that take advantage of green financing. The findings of this research contribute toward the sustainability banking debate and serve as a solid reference for setting up resilience and innovation-geared banking systems in host countries. It highlights the co-existing interplay of sustainability, competition, and profitability within transitioning markets.