Internal fraud (operational risk) and bank performance in Indonesia

This research investigates the impact of internal fraud, which is the main component in operational risk to bank performance in Indonesia. Some previous studies in developed countries have found that operational risk will give negative impact to bank performance, because operational risk such as fraud and human errors will reduce profitability and increase cost. Using data in Indonesia from 2010 to 2016, this study finds that banks with higher internal fraud tend to have worse performance. This result is in line with the previous research done in developed countries. Due to the fact that banks in Indonesia are very proactive to mitigate fraud as the situation in Indonesia is very sensitive to fraud. The media will expose the case, and it will hurt bank's reputation as Indonesian people are very reactive to news. Therefore, banks in Indonesia have put operational risk into one of their main concerns throughout the years which later shown to a very low number of internal frauds among big Indonesian banks.