ISSN 2623-0690 (Ceta.
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Business Management Analysis Journal (BMAJ) Vol.
08 No.
02 October 2025
FACTORS AFFECTING FINANCIAL DISTRESS IN
CONVENTIONAL BANKING LISTED ON THE INDONESIAN
STOCK EXCHANGE
Susy Muchtar1.
Wahyuni Rusliyana Sari2*.
Afrizal Elgi3.
Catur Rahayu Martiningtiya4.
Mohammed Elgammal5
1,2,3,4
Faculty of Economics and Business.
Universitas Trisakti.
Indonesia Center for Entrepreneurship and Organizational Excellence.
Qatar University.
Qatar Correspondence email: wahyuni.
rusliyana@trisakti.
Received: 15 June 2025
Reviewed: 30 Augt 2025 Accepted: 23 Sept 2025
Published: 31 Oct 2025
ABSTRACT
COVID-19 and the Russian-Ukrainian conflict have driven global inflationary pressures.
This situation allows banks worldwide to implement interest rate hikes, which can lead to increased High inflation may cause financial distress across sectors, including banking a vital part of the economy.
This research aims to identify factors that contribute to financial distress.
The study analyzed 35 conventional banks listed on the Indonesia Stock Exchange from 2018 to 2022 using logistic regression.
The results show that banks with high solvency ratios are more likely to face financial distress.
Conversely, higher profitability ratios reduce the risk of financial distress.
The findings can help regulators and policymakers develop policies that ensure capital adequacy and boost banking profits, thereby preventing financial distress, especially during economic downturns.
This research serves as a reference for conventional banks to prevent financial distress by optimizing capital management and enhancing Specifically, the study investigates how these variables impact financial distress in Indonesian banking.
By applying established financial indicators in a new economic and regulatory context, this research contributes to the literature by providing empirical evidence on what causes financial distress in IndonesiaAos banking sector.
Keywords: financial distress, liquidity, non-performing loans, profitability, solvency.
INTRODUCTION
Post-COVID-19 and the Russia-Ukraine war, these markets have attracted the attention of investors and researchers (Dhingra et al.
, 2.
The COVID-19 pandemic has had a significant impact on nearly every business sector in various countries (Leon et al.
, 2023.
Mousa & Ozili, 2.
Governments in different countries implemented lockdown policies during the pandemic, leading to a decline in demand for goods and services and disrupting the DOI: https://doi.
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This has led to higher oil and food prices (Mousa & Ozili, 2.
The global economic decline continues due to the Russia-Ukraine conflict, which also disrupts international trade (World Bank, 2.
According to the World Bank .
, the Russia-Ukraine conflict causes high global inflation and financing problems.
Fuel shortages have triggered worldwide inflation.
The Russian-Ukrainian conflict has increased global inflationary pressures, raising the prices of various commodities, especially fuel and food, and disrupting global supply chains (Guynette et al.
, 2.
High inflation is often followed by a decline in global economic conditions, leading to stagflation (World Bank, 2.
The projection for a global economic decline in 2022 is 2.
8 percent, and in 2023 it is 2.
3 percent (Guynette et al.
, 2.
The Ministry of Finance of the Republic of Indonesia .
stated that the recession caused an overall economic slowdown.
The recession impacted the real sector, particularly through a decrease in economic activity among the population.
This decline in community economic activity could disrupt operations across various sectors, including the banking Banking operations are closely linked to the intermediation of public funds, especially the provision of credit and the acceptance of third-party funds, making the banking sector a key part of supporting the community's economy.
If people's economic activity falls, banks will likely see their income decrease.
This could lead to a decline in bank earnings and financial instability, potentially causing a chain reaction that raises the risk of an economic crisis (Aman.
Isayas .
discusses the challenges faced by entities experiencing financial distress, including operational insolvency, dividend reductions, financial losses, plant closures, declining stock prices, and the loss of both customers and employees.
According to Isayas .
, financial distress can be assessed using the Altman Z-Score.
Furthermore.
Isayas .
identifies key indicators of financial distress, such as return on assets, firm size, liquidity, capital adequacy, and loan loss provisions.
Similarly.
Aman .
highlights various factors influencing financial distress in banks, including liquidity, profitability, solvency, bank size, and inflation.
Koko & Hassan .
also emphasize the impact of macroeconomic and financial variables on financial distress, particularly the inflation rate, non-performing loans, and liquidity levels.
Aman .
reported positive effects on both profitability and liquidity related to financial distress.
Additionally.
Aman .
showed that solvency, size, and inflation DOI: https://doi.
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Business Management Analysis Journal (BMAJ) Vol.
08 No.
02 October 2025 negatively impact financial distress.
Aman .
also states that efficiency does not significantly affect financial distress.
Furthermore.
Koko & Hassan .
argue that nonperforming loans have a positive and significant effect on bank distress.
Koko & Hassan .
find that inflation and liquidity do not have a significant influence on bank distress.
Jati et al.
found in Indonesia that firm size and liquidity negatively affect financial distress, while leverage positively influences it.
Additionally, institutional ownership moderates the relationship between liquidity and financial distress.
Firm size negatively impacts liquidity, and liquidity does not mediate the effect of firm size on financial distress.
Another study on financial distress during the COVID-19 pandemic in Indonesia from 2019 to 2021 found that sales growth and profitability are associated with financial distress (Hidayanti & Cahyono, 2.
Later research in Indonesia indicated that operating cash flow, company size, retained earnings, and director size negatively affect financial distress (Anggraeni et al.
, while profitability and liquidity help reduce financial distress (Octaviany & Ratnasari.
Building on the research by Aman .
Anggraeni et al.
Hidayanti & Cahyono .
Isayas .
Jati et al.
Koko & Hassan .
Octaviany & Ratnasari .
, which explored the link between financial distress and factors such as profitability, sales growth, cash flow, liquidity, leverage, institutional ownership, director size, solvency, nonperforming loans, bank size, and inflation, this study expands the analysis within the Indonesian context.
This research not only confirms earlier findings but also offers insights valuable to policymakers, financial institutions, and investors in Indonesia.
LITERATURE REVIEW
Financial distress is a serious condition that can lead to bankruptcy and the collapse of institutions when an entity cannot meet its financial obligations (Gichaiya et al.
, 2.
In the banking sector, financial distress serves as an early warning sign of a bank's financial health (Platt & Platt, 2.
Bank distress is characterized by illiquidity, poor earnings, and nonperforming assets (Koko & Hassan, 2.
Unlike other sectors, financial distress in banking has unique consequences, including systemic risks that can destabilize the broader financial system and economy (Kablay & Gumbo, 2021.
Rastogi & Kanoujiya, 2.
Financial distress is usually defined as a company's failure to fulfill debt obligations to creditors (Isayas, 2.
and the inability to pay financial commitments to suppliers and DOI: https://doi.
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The primary form of financial distress in banks is asset quality deterioration, which leads to reduced performance, liquidity problems, and potential bank failure (Rastogi & Kanoujiya, 2.
Financial distress encompasses inadequate cash flows, declining profitability, worsening asset-liability ratios, loss of creditor confidence, poor capital structure, weak corporate governance, and market competition pressures (Ikpesu & Eboiyehi, 2.
1 Measurement of Financial Distress Various models are available for assessing financial distress in the banking sector.
The Altman Z-score method estimates financial distress using ratios such as net working capital to total assets, retained earnings to total assets.
EBIT to total assets, and the market value of equity to total liabilities (Rastogi & Kanoujiya, 2.
The Z-score classifies firms into three groups:
non-distressed (Z > 2.
, gray area .
23 O Z O 2.
, and distressed (Z < 1.
(Malik et al.
Other models include the Debt Service Coverage Ratio, which measures operational income relative to debt obligations (Aman, 2.
, and the CAMELS rating system, which assesses capital adequacy, asset quality, management, earnings, liquidity, and sensitivity (Kablay & Gumbo, 2.
Additionally, decision tree models (CART) use financial ratios such as working capital to total assets, current ratio, debt ratio, and retained earnings to total assets (Halteh et al.
, 2.
2 Key Determinants of Financial Distress in Banking 1 Profitability Profitability reflects a bank's capacity to generate revenue relative to its assets (Isayas.
It is commonly measured by return on assets (ROA), which indicates net income in relation to total assets (Kablay & Gumbo, 2021.
Aman, 2.
Many studies highlight an inverse relationship between profitability and financial distress, implying that banks with higher profitability are less likely to experience distress (Aman, 2019.
Asyikin & Chandrarin.
Hazami-Ammar & Gafsi, 2021.
Abiola et al.
, 2.
Net income increases retained earnings, strengthening bank capitalization and resilience against financial distress.
2 Liquidity Liquidity reflects a bank's ability to fulfill short-term obligations (Isayas, 2.
Insufficient liquidity may cause a bank run, worsening financial distress (Kablay & Gumbo.
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Liquidity is often measured using ratios such as liquid assets to total deposits, current assets to current liabilities, and loan-to-deposit ratios (Aman, 2019.
Asyikin & Chandrarin, 2018.
Dzingirai, 2.
Research indicates that liquidity can either positively or neutrally impact financial distress, depending on credit risk and interest expense management (Aman, 2019.
Koko & Hassan, 2.
3 Solvability Solvability, or capital adequacy, shows a bank's ability to cover its liabilities with its capital base (Aman, 2019.
Kablay & Gumbo, 2.
Capital adequacy is measured by Tier 1 and Tier 2 capital relative to risk-weighted assets (Aman, 2019.
Wulandari & Kusairi, 2.
A large body of research indicates a negative relationship between capital adequacy and financial distress, and that well-capitalized banks tend to be more resilient (Alali & Romero.
Asyikin & Chandrarin, 2.
However, holding too much capital reserves might decrease operational efficiency, impacting profitability and increasing the risk of distress (Wulandari & Kusairi, 2.
4 Non-Performing Loans (NPL.
NPLs are loans that experience a decline in credit quality (Kablay & Gumbo, 2.
They are assessed using gross and net NPL ratios.
higher ratios indicate greater risk of financial distress (Financial Services Authority, 2.
Research highlights a strong positive correlation between NPLs and financial trouble, as rising default rates reduce interest income and profitability (Abiola et al.
, 2015.
Koko & Hassan, 2017.
Pruitt, 2.
Effective credit monitoring and loan restructuring strategies can help reduce the adverse effects of NPLs on financial stability (Wulandari & Kusairi, 2.
5 Inflation Inflation, which is the general rise in price levels, influences banking stability by increasing operational costs and default risks (Central Bureau of Statistic.
Inflation's effect on financial distress can be either positive or negative, depending on a bankAos ability to adjust interest rates properly (Aman, 2019.
Baselga-Pascual et al.
, 2.
Some research suggests that inflation results in higher financial distress due to greater default risks (Baselga-Pascual et al.
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, while other studies show that banks with strong regulatory measures can mitigate inflation's negative effects (Aman, 2019.
Koko & Hassan, 2.
To summarize, financial distress in banking results from multiple interconnected factors, including profitability, liquidity, solvency.
NPLs, and inflation.
Different models measure financial distress in various ways, with the Altman Z-score.
CAMELS rating, and capital adequacy assessments providing key insights.
Conversely, profitability and capital adequacy tend to have a negative relationship with distress, while liquidity and inflation show mixed effects.
Effective risk management and strategic financial planning are essential in reducing financial distress and maintaining stability in the banking sector.
The COVID-19 pandemic triggered global inflation, resulting in higher oil and food prices (Mousa & Ozili, 2.
Guynette et al.
predicted high inflation in 2023, which would increase commodity prices worldwide, followed by an economic slowdown.
The global economic decline led to a recession, which impacts financial distress.
Isayas .
evaluated financial distress using the Altman Z-Score in a study of Ethiopia's financial sector from 2008 to 2019.
He highlights that financial distress can be detected through return on assets, size, liquidity, capital adequacy, and loan loss provisions.
Furthermore.
Aman .
explores the factors leading to financial distress in Ethiopian banks between 2012 and 2016.
He notes that liquidity, profitability, solvency, and inflation are crucial factors driving distress in banks.
These results align with those of Koko & Hassan .
, who argued that inflation rate, non-performing loans, and liquidity ratio affect financial distress in Nigeria's banking sector during the period 1986 to.
Aman .
identified profitability and liquidity as factors that significantly positively impact financial distress, while solvability and inflation were found to have a significant negative impact.
Additionally.
Koko & Hassan .
reported that non-performing loans have a positive and significant influence on bank distress.
However, their study also suggested that inflation and liquidity do not have a statistically significant effect on bank distress.
Moreover.
Aman .
indicated that efficiency does not significantly affect financial distress.
Based on these findings, a conceptual framework is proposed to illustrate the relationship between the independent variablesAiprofitability, liquidity, solvability, nonperforming loans, and inflationAiand the dependent variable, financial distress.
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Business Management Analysis Journal (BMAJ) Vol.
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02 October 2025 Figure 1.
Conceptual Framework Hypothesis Development Profitability and financial distress Aman .
and Asyikin & Chandrarin .
find that profitability has a significant negative effect on financial distress.
This finding is supported by Hazami-Ammar & Gafsi .
, who document a negative impact of return on assets on financial distress and observe that bank profitability is influenced by size, revenue, and expenses.
A high level of profitability can be achieved by increasing revenue and/or reducing expenses.
Highly profitable banks are not considered to be in financial distress.
Based on this review, the formulation of the first research hypothesis is:
H1: Profitability has a significant adverse effect on financial distress.
Liquidity and financial distress Aman .
and Asyikin & Chandrarin .
found that liquidity has a significant positive effect on financial distress.
Liquidity is defined as the ratio of loans granted to debtors relative to deposits received from third parties.
Banks accept deposits, which are then allocated as credit to borrowers.
A higher volume of loans granted increases the liquidity ratio.
However, an increase in loans also raises credit risk.
A high level of credit risk indicates a growing proportion of non-performing loans, which negatively affects bank profitability and ultimately DOI: https://doi.
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Based on this rationale, the second hypothesis is formulated as follows:
H2: Liquidity has a significant positive effect on financial distress.
Solvability and financial distress Wulandari & Kusairi .
emphasized that capital adequacy, as a measure of solvency, positively affects bank stability.
A high capital adequacy ratio suggests the bank may not be using its capital efficiently to support operational activities.
Banks tend to retain their equity as a safeguard against deteriorating financial conditions.
This can lead to a decrease in revenue and profitability and, potentially, financial distress, which could ultimately lead to bank failure.
Based on this explanation, the formulation of the third hypothesis is:
H3: Solvability has a significant positive effect on financial distress.
Non-performing loan and financial distress Abiola et al.
state that non-performing loans have a significant positive impact on financial distress.
This finding is supported by Kablay & Gumbo .
Non-performing loans arise from credit defaults.
A higher level of non-performing loans indicates an increase in the amount of credit the debtor fails to repay.
This, in turn, reduces interest revenue, thereby lowering bank income.
Lower income for banks leads to greater financial distress.
Based on this, the fourth hypothesis is:
H4: Non-performing loan has a significant positive effect on financial distress.
Inflation and financial distress Baselga-Pascual et al.
argue that inflation positively influences banking distress.
Inflation causes a general increase in the prices of goods and services, which can particularly affect bank debtors by reducing their ability to repay loans.
As a result, the risk of default rises, leading to more non-performing loans (NPL.
The rise in NPLs then decreases bank profitability and raises the likelihood of financial distress.
Based on this reasoning, the fifth hypothesis is formulated as follows:
H5: Inflation has a significant positive effect on financial distress DOI: https://doi.
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RESEARCH METHOD
Research Design This research examines how profitability, liquidity, solvency, non-performing loans, and inflation influence financial distress in the banking industry.
It analyzes a sample of 47 banks listed on the Indonesia Stock Exchange from 2018 to 2022.
The data collection method used is panel data.
Purposive sampling was employed to choose the analysis units.
The study utilizes EViews 12.
0 software for data analysis.
Variables and Measurement.
The variables used in this research to determine the factors that influence the independent variable are as follows:
Table 1.
Definition of Operational Variables Variable Name of Variable Financial Measurement Scale Source Altman Z Score Ross et al.
, .
Distress
ROA
Net Income Total Asset Profitability Isayas .
Abdurrozaq et al.
LQD
Liquidity CAR
Solvability NPL
Nonperforming Loan
INF
Inflation Total Loans Total Deposit ycycycuycuycuyce Asyikin & Chandrarin, .
Tier 1 Tier 2 Kablay & Gumbo Risk Weighted Asset .
Nonperforming Loan Total Loan Annual Inflation Rate (%) Yahaya et al.
Alhassan et al.
Data Collection Methods.
The data collected is secondary data obtained from conventional banking financial reports published on the Indonesia Stock Exchange website, the World Bank website, the DOI: https://doi.
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Logistic regression is used to analyze how independent variables affect the dependent variable, financial distress, which is measured on a dichotomous scale.
This method is applied to conventional banks listed on the Indonesia Stock Exchange (IDX) over a five-year period .
8Ae2.
to identify the factors that influence financial distress.
Table 2.
Test Results Hosmer and Lemeshow Dependent Variable H-L Stat Financial Distress Probability Decision Chi-Sq.
H0 accepted Source: Eviews processed Based on Table 2, the P-value .
4643 > 0.
indicates that the model explains the data Table 3.
F-Test Results Dependent Variable LR-Stat Financial Distress Probability Decision H0 rejected Source: Eviews processed Based on Table 3, the F-value < .
000001 < 0.
, so it can be concluded that H 0 is rejected and at least one independent variable influences the dependent variable.
Therefore, the regression model is appropriate for use.
RESULTS AND DISCUSSION
Results Descriptive statistics The results of descriptive statistical tests are described as follows:
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Descriptive Statistical Analysis Min.
Maks.
Mean Std.
Dev Financial Distress Profitability Liquidity Solvability Non-Performing Loan Inflation Variable Source: processing results Eviews 12.
The minimum profitability value for PT Bank Raya Indonesia Tbk in 2022 is -0.
while the maximum profitability value for PT Allo Bank Indonesia Tbk in 2022 is 0.
LiquidityAos average is 0.
869128, with a standard deviation of 0.
The lowest liquidity value, 0.
123534, was recorded by PT Bank Capital Indonesia Tbk in 2022, while the highest, 780920, was recorded by PT Bank Tabungan Pensiunan Nasional Tbk in 2019.
Solvability has an average of 0.
268892 and a standard deviation of 0.
The lowest solvability value is 0.
105233, recorded by PT Bank KB Bukopin Tbk in 2018, while the highest 699183, recorded by PT Bank Jago Tbk in 2022.
Non-performing loans have an average 029544 and a standard deviation of 0.
The minimum non-performing loan value of 0 was reported by PT Bank Jago Tbk in 2020 and PT Bank Capital Indonesia Tbk in 2022, while the maximum non-performing loan amount of 0.
157525 was recorded by PT Bank Neo Commerce Tbk in 2018.
Inflation has a mean of 2.
7 and a standard deviation of 0.
The lowest inflation rate of 1.
6 occurred in 2022, and the highest rate of 3.
8 was in 2018.
Logistic Regression Analysis Results.
This study uses logistic regression to examine how independent variablesAisuch as profitability, liquidity, solvency, and non-performing loansAiand the control variable .
influence the dependent variable, which is financial distress.
The results of the regression equation are as follows:
Zit = -3,172971 Ae 10,90425ROAit Ae 0,860840LQDit 7,799935CARit 9,227081NPLit Ae 0,130974INFit a 1 DOI: https://doi.
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Partial Test Results Dependent Variable Independent Variable Financial Distress Coefficient Probability Conclusion Constant Profitability 09865**) Significant Liquidity Not Significant Solvability Significant Nonperforming Loans Not Significant Inflation Not Significant Source: processing results Eviews 12.
*) significant at 10 percent, **) significant at 5 percent Discussion Based on the discriminant analysis conducted, the influence of each independent variable on the dependent variable is explained as follows:
Profitability and financial distress The results of this research's discriminant analysis showed that profitability significantly negatively impacted financial distress.
These findings align with previous studies (Abiola et , 2015.
Aman, 2019.
Asyikin & Chandrarin, 2018.
Hazami-Ammar & Gafsi, 2.
The higher the net income, the healthier the bank.
Banks with higher net income can more effectively and efficiently utilize their assets to maximize revenue and cut costs.
This helps improve net income and overall bank profitability.
The greater the net income, the larger the share the bank must retain as retained earnings, which will be used to strengthen capital.
Liquidity and financial distress The results of the discriminant analysis showed that liquidity does not influence financial These findings contradict Aman .
research, which states that liquidity has a positive and significant impact on financial distress.
The results align with research by Koko & Hassan .
, who found that liquidity does not significantly affect financial distress.
Liquidity should significantly affect interest revenue.
However, when the bank holds large DOI: https://doi.
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High liquidity also increases the bank's exposure to considerable credit risk, but this doesn't necessarily mean the bank is experiencing bad debt.
Conversely, low liquidity does not automatically signal low credit risk.
Both high and low liquidity pose the same risk of financial distress, so banks must continuously monitor credit levels and deposits to prevent it.
Solvability and financial distress The results of the discriminant analysis show that solvability has a significant positive impact on financial distress.
These findings are consistent with those of Wulandari & Kusairi .
, who found that capital adequacy acts as a measure of solvency and significantly influences bank distress.
Capital adequacy ratio: A high level indicates that the bank may not be using its capital effectively to support operational activities such as marketing and Banks often keep their equity as a safety measure when financial conditions This can lead to lower revenue, which reduces income.
Decreased income then lowers bank profitability, increasing the risk of financial distress and bank failure.
These results contrast with Aman .
, who found that solvability has a significant negative effect on financial distress.
Non-performing loans lead to financial distress The results of the discriminant analysis show that non-performing loans do not affect financial distress.
These findings contradict research by Koko & Hassan .
, who stated that non-performing loans have a significant positive effect on financial distress.
The results align with Africa .
, who argued that non-performing loans do not have a significant impact on financial distress.
Non-performing loans reduce bank income, which can lead to financial problems.
Loans that are being restructured, reconditioned, and rescheduled can generate revenue for the bank, depending on the bank's credit quality.
Banks that regularly monitor credit are less likely to see a major drop in profits, even with many non-performing Inflation leads to financial distress The results of the discriminant analysis indicate that inflation has no significant impact on financial distress.
These findings contradict Aman .
, who showed that inflation has a DOI: https://doi.
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However, they align with research by Koko & Hassan .
, which found that inflation does not significantly affect financial distress.
Wulandari & Kusairi .
also stated that inflation has no substantial influence on financial Banks that implement internal regulatory measures in response to inflation can influence their revenue.
The bank establishes policies that adjust the inflation rate, often linked to the interest rate.
Inflation does not significantly affect bank distress when the gap between the interest rate and the inflation rate is not too large.
CONCLUSION
Based on the analysis and discussion results, the following conclusions can be drawn:
profitability significantly negatively impacts financial distress.
In contrast, solvability has a substantial positive effect on financial distress.
Conversely, liquidity, non-performing loans, and inflation do not affect financial distress.
Two implications of this research are as follows.
First, for regulators: in the current economic climate, where downturns pose significant challenges for financial institutions, it is vital that the government adopt a comprehensive, strategic approach when developing banking-sector policies.
Second, for banking managers:
they should consider a broad range of factors that can reduce the risk of financial distress, focusing on revenue growth rather than only preventive measures to maintain equity at excessively high levels.
For further research, consider the following: First, extend the research period by up to ten years (Dinh et al.
, 2021.
Hieu et al.
, 2025.
Muchtar et al.
, 2.
Second, include more countries, such as ASEAN members like Indonesia.
Malaysia.
Singapore.
Thailand, the Philippines, and Vietnam (Dhingra et al.
, 2025.
Masripah & Arieftiara, 2025.
Muchtar et al.
Putri & Naibaho, 2.
Third, add more variables such as economic growth, interest rates, and exchange rates (Koko & Hassan, 2.
firm size, leverage, and institutional ownership (Jati et al.
, 2.
sales growth (Hidayanti & Cahyono, 2.
operating cash flow.
and director size (Anggraeni et al.
, 2.
REFERENCES