Political Connections, Credit Risk, and Financial Performance: State-Owned versus Private Banks

Abstract

This study aims to examine the impact of political connections and credit risk (Non-Performing Loan/NPL) on financial performance (Return on Assets/ROA), and to analyze the comparative differences of their impacts between conventional state-owned and private banks listed on the Indonesia Stock Exchange for the 2020–2025 period. This quantitative study employs panel data regression utilizing the Common Effect Model (CEM) approach on a sample of 37 conventional banks (yielding 222 observations) selected through purposive sampling. Empirical findings reveal that political connections partially have no significant effect on bank profitability. Conversely, credit risk (NPL) demonstrates a negative and significant impact on financial performance. Furthermore, the ownership interaction test confirms no significant structural difference regarding the impact of these variables between state-owned and private banking groups. The results imply that strict regulatory oversight successfully neutralizes both the potential agency costs and the economic privileges associated with political connections. Additionally, the provisioning burden caused by surging NPLs acts as a universal destructive determinant on bank profitability, overriding the institution's ownership status or dual mandates. Keywords: Political Connection, Credit Risk, Financial Performance, Profitability, State-Owned Banks, Private Banks.