HOW CORPORATE GOVERNANCE , CREDIT RISK AND PERFORMANCE LINK TOGETHER ?

Purpose: In this study, a research was conducted to compare link corporate governance, credit risk, and performance on conventional banking and islamic banking in Indonesia. Methodology: This research used quantitative method with Generalized Structured Component Analysis (GSCA) for testing and analzing. In this study using conventional and sharia banking data in Indonesia for the period 2012-2016 which are listed on the Indonesia Stock Exchange and the Indonesian Financial Services Authority. Finding: The result of research showed that on the conventional banking, profitability is influenced by the link together of corporate governance, liquidity and credit risk, while on the islamic banking, profitability is influenced by the link together of liquidity and credit risk. Practical Implication: First, the existence and number of the Board of Commissioners and Audit Committee in conventional banking are able to support the achievement of performance. This should be maintained and improved. Second, supervision is needed to manage distributing of sharia financing. Islamic banking has two indicators that play a role in the formation of credit risk which have the potential to reduce liquidity and profitability. Third, it is necessary to trade-off for the management of islamic banking in managing their liquidity because the increase in liquidity has the potential to reduce profitability. Novelty: The first study comparing the linkage between corporate governance, credit risk and performance in conventional and islamic banking in Indonesia using GSCA. 2 How Corporate Governance. . . . . Vol. 29, No. 3 December 2021 © Centre for Indonesian Accounting and Management Research Postgraduate Program, Brawijaya University


INTRODUCTION
Discussion about corporate governance cannot be separated from the agency theory, where there is an agency problem between managers and principals. Agency problems that occur in banks can be broader, not only between managers and principals, but also with depositors, debtors and regulators, even regulators have a strong influence on corporate governance in banking (Ciancanelli & Reyes-Gonzalez, 2005;Macey & O'Hara, 2003;Marcinkowska, 2012).
Sound banking with good governance is intended to prevent a recurrence of the economic crisis caused by weak governance, including banking governance (Zhuang et al., 2001). On one side, Islamic banking as part of the financial and banking system in Indonesia will also face a between managers and principals, managers have more information than principals related to internal companies. Related to the problems that happened, Shleifer and Vishny, (1996) stated that Corporate Governance can be a tool that gives confidence to investors that they will get a return on invested funds. With good performance, the company is expected to be able to generate returns. Todorovic, (2013) stated that companies that have a good level of corporate governance implementation tend to be more profitable and have better performance.
In the banking industry, agency problems that occur can be wider than non-financial industries. Asymmetric information that occurs besides managers and principals can also occur between managers and depositors' customers, as well as regulators. The balance sheet composition of banks, in terms of liabilities is dominated by third party funds, then on the asset side, it was dominated by credit or financing and managers do not need to ask the depositors for permission to use the funds deposited for credit expansive, asymmetric information arises.
customer funds for investment in securities that were not reported to regulators, granting credit to the group of owners or commissioners in amounts exceeding the limit or fictional engineering of lending, the impact is detrimental to customers who deposit their funds in the bank.
This is one form of agency problems that occur in banks between managers, principals and regulators.
The banks have an intermediary function, this makes the capital structure different from non-financial companies. The relatively small position of bank capital against debt compared to non-financial companies (even position of debt can reach more than 80%) with the composition of debt is third party funds with short tenors (liquid), while on the asset side, loans are mostly long tenors (illiquid), making a mismatch between the position of debt and assets of the bank (Macey & O'Hara, 2003 Furthermore, Solomon and Solomon, (2004) also stated that Corporate Governance has influence on performance, where companies with a weak corporate governance structure will produce worse performance than companies that have a better corporate governance structure. This shows that corporate governance is expected to support performance achievement.  and Ghaffar, (2014) in Pakistan also stated that corporate governance had positive effect on profitability. The three studies above also revealed that one of the important corporate governance attributes that influence profitability was Board Size. Likewise, the research of Inam and Mukhtar, (2014) (Megeid, 2013)), even able to cause a banking crisis (Vodová, 2003).

IMPACT CREDIT RISK ON LIQUIDITY
Some empirical studies such as conducted by Megeid, (2013)  Referring to some of the previous studies above and anticipating income theory, it is predicted that credit risk has an impact toward liquidity (hypothesis-3).

IMPACT CREDIT RISK ON PROFITABILITY
in Iran, Kodithuwakku, (2015) in Srilanka showed that credit risk had negative impact to profitability. This means that deterioration of the quality of financing, it will reduce profitability. Referring to several previous studies above, that credit risk has a significant effect on profitability, it is predicted that credit risk has an impact toward profitability (hypothesis-4).

LIQUIDITY
In general, liquidity in banks is needed to meet the withdrawal of customer funds in the form of savings, current accounts, or other funding products, and to support the achievement of credit targets (Delis et al., 2009). With this liquidity function, making banks have different characteristics compared to other companies, which are often called liquidity providers, on the liability side, providing liquid funds meets the needs of withdrawing funds from third party fund customers, on the asset side providing funds to borrowing customers in forms of credit (Diamond & Dybvig, 1983).  (Marozva, 2015)). For this reason, the management of banking liquidity is important in supporting the stability of the banking sector as a whole (Ghenimi & Omri, 2015).

IMPACT LIQUIDITY ON PROFITABILITY
Some empirical studies such as those of R. A. Khan    Analysis of the data used descriptive statistics to get a general picture of the collection of data collected and inferential statistics by the Generalized Structured Component Analysis (GSCA) method to provide conclusions. Variable description is in table 2.

DESCRIPTIVE ANALYSIS
Descriptive analysis in this research uses data in table 3. Based on table 4, in conventional banking, weight estimate of LLP indicator showed positive value and above 0.5, while in Islamic banking, there are two positive value indicators and above 0.5, namely LLP and ACA. This illustrates that in conventional banking there was one indicator that formed the credit risk variable, whereas in Islamic banking there are two indicators that formed credit risk. When referring to table 3, for the 2012-2016 period, the average LLP of conventional banking is of 1,17%, while the average LLP and ACA of Islamic banking are 1.6%and 2.3%. Based on table 3 and 4, it can be concluded that credit risk in Islamic banking had a risk level higher than conventional banking, which can be seen from the number of indicators forming the variable and greater average of ACA.
Based on table 4, in conventional banking there are two indicators of liquidity variables that have weight estimate positive value and above 0.5, namely LDR and ALTA, while in Islamic banking, there are also two indicators that are positive but only one that is above 0.5 namely ALTA. This shows that the tendency of liquidity variables in conventional banks is stronger

Vol. 29, No. 3 December 2021 © Centre for Indonesian Accounting and Management Research Postgraduate Program, Brawijaya University
because it is composed of two indicators (LDR and ALTA). This is also supported from the data in table 3, that in the 2012-2016 period, the average ALTA was higher in conventional banking at 24.63%, and the LDR average was 81.89%. Even though the average Islamic banking LDR is larger, because its weight estimate is small, it cannot explain variable of liquidity.
Based on table 4, both conventional and islamic banking, there is only one indicator that can explain profitability variables, namely ROA because only this indicator has weight estimate positive value and above 0,5. Based on the data in table 3, during the 2012-2016 period, the profitability of conventional banking was relatively better because it had a greater average ROA.

Vol. 29, No. 3 December 2021 © Centre for Indonesian Accounting and Management Research Postgraduate Program, Brawijaya University
Hypothesis-1 Based on table 5, the estimation results and P value in Islamic banking showed corporate governance had significant effect on liquidity with positive direction, meaning that hypothesis-1 was accepted. This is in accordance with research by Nurtrontong et al., (2018) in conventional banking.

Hypothesis-2
Based on table 5, the estimation results and P value in Islamic banking showed that corporate governance had no effect on profitability, meaning that hypothesis 2 was rejected. This is not in accordance with research by Nurtrontong et al., (2018) in conventional banking.

Hypothesis-3
Based on table 5, the estimation results and P value in Islamic banking showed that credit risk had significant effect on liquidity with negative direction, meaning that hypothesis 3 was accepted. This is consistent with research by Nurtrontong et al., (2018) in conventional banking, but with different direction.

Hypothesis-4
Based on table 5, the estimation results and P value in Islamic banking showed that credit risk had significant effect on profitability with negative direction, meaning that hypothesis 4 was accepted. This is consistent with research by Nurtrontong et al., (2018) in conventional banking.

Hypothesis-5
Based on table 5, the estimation results and P value in Islamic banking showed that liquidity had significant effect on profitability with positive direction, meaning that hypothesis 3 is accepted. This is consistent with research by Nurtrontong et al., (2018) in conventional banking, but with different direction.

IMPACT CORPORATE GOVERNANCE ON LIQUIDITY
Based on above results, the research showed that corporate governance had significant effect toward liquidity in islamic banking and also was relevant to previous research by Nurtrontong et al., (2018) in conventional banking. BOC and AC had an important role in the corporate governance mechanism, especially regarding the supervision of the directors' performance in achieving liquidity. An increasing number of Board of Commissioners and/or Audit Committees on islamic and conventional banking would increase supervision of bank performance, in terms of liquidity.
This result confirmed previous research such as Chung et al., (2010), Florinita, (2014, Abogun et al., (2013), Inam and Mukhtar, (2014) and Hassan et al., (2017). This research also supported the agency theory that implementation of corporate governance would support achieve performance especially liquidity through active supervision from BOC and AC.

IMPACT CORPORATE GOVERNANCE ON PROFITABILITY
Based on above results, the research showed that corporate governance had no significant effect toward profitability in islamic banking and wasn't relevant to previous research by Nurtrontong et al., (2018) in conventional banking. Although BOC and AC on Islamic banking were able to support the achievement of liquidity performance, but based on this research, it were not able to support profitability performance. This result indicated that the achievement of profitability performance in islamic banking had not been generated from the corporate governance mechanism, especially the variables of BOC or AC, but could come from other factors outside of corporate governance or other indicators outside of BOC and AC. This is an important difference from previous research by Nurtrontong et al., (2018) that corporate governance had impact on profitability through existence and amount of BOC and AC in conventional banking.
Result of research on islamic banking confirmed previous research such as Omoniyi et al., (2013), Syam and Najda, (2012) and Rashid et al., (2010) that corporate governance didn't affect on profitability, but didn't confirm research of Tornyeva and Wereko, (2012), Najjar, (2012), Ghaffar, (2014), Todorovic, (2013, and as did by Nurtrontong et al., (2018). The existence and number of BOC and AC need to be evaluated to improve supervision of the directors's performance in achieving profitability. This is one of the important findings in this research.

IMPACT CREDIT RISK ON LIQUIDITY
Based on above results, the research showed that credit risk had significant effect on the liquidity in Islamic banking and was relevant to previous research by Nurtrontong et al., (2018) in conventional banking but with different direction. LLP ratio and ACA ratio have an important role in the formation of credit risk in islamic banking. An increase in LLP and ACA ratio would reduce liquidity, because the formation of reserves was sourced from bank income which was one of the main factors of sources of liquidity. This was in accordance with anticipating income theory, because the smooth payment from customers is source of banking liquidity. This result was different from previous research by Nurtrontong et al., (2018), where if in conventional banking, credit risk would increase liquidity.
Result of research on islamic banking confirmed previous research such as Gautam, (2016), Megeid, (2013, (Laurine, 2013), Munteanu, (2012, Alzoubi, (2017) that deterioration in the quality of financing would reduce liquidity. The high ratio of LLP and APB needed to be a concern for Islamic banking and regulators because it had the potential to reduce liquidity. The better management of credit risk would increase liquidity, and vice versa.

IMPACT CREDIT RISK ON PROFITABILITY
Based on above results, the research showed that credit risk had significant effect on the profitability in islamic banking and was relevant to previous research by Nurtrontong et al., (2018) in conventional banking. An increase in LLP and ACA would reduce profitability because it was sourced from bank income. The result of study indicated that in islamic and conventional banking, the deterioration of credit would reduce profitability.

Vol. 29, No. 3 December 2021 © Centre for Indonesian Accounting and Management Research Postgraduate Program, Brawijaya University
Result of research on islamic banking confirmed previous research concepts such as Lata, (2014), Musyoki and Kadubo, (2012), Tabari et al., (2013), and Kodithuwakku, (2015. The high ratio of LLP and ACA should be a concern for Islamic banking and regulators because it had the potential to reduce profitability. The better management of credit risk would increase profitability, and vice versa.

IMPACT LIQUIDITY ON PROFITABILITY
Based on above results, the research showed that liquidity had significant effect on the profitability in islamic banking and was relevant to previous research by Nurtrontong et al., (2018) in conventional banking but with different direction. An increase in liquidity would potentially reduce profitability. The ALTA ratio, which is quite good, apparently hadn't been able to support the increase in profit and even tended to reduce profit. This indicated that in the islamic banking liquid assets did not contribute to achieve the profit, which is different from previous research by Nurtrontong et al., (2018) in conventional banking that their liquid assets contributed to increase the profit. This is most likely due to the position and structure of liquid assets. This condition should be a concern for regulator and management of islamic banking that the management of liquid assets is too large, which had the potential to reduce profitability. This is one of the important findings in this research.
This research also is in accordance with the trade-off theory where there is trade-off in liquidity management. If it is too high, it will potentially reduce profitability, but the liquidity position is in safe condition. If it is small, it will potentially increase profitability, because a lot of liquidity is distributed into financing to get profitability, but the liquidity position is less secure due to anticipate the withdrawal from depositors' customers.
Overall based on above discussion, the research showed that in islamic banking, collaboration of credit risk and liquidity would affect profitability except corporate governance. Whereas in conventional banking, collaboration of corporate governance, credit risk and liquidity affected achievement of profitability.

MANAGERIAL IMPLICATION
There are some managerial implications that can be useful input for regulators and management of islamic and conventional banking. Firstly, the existence and number of the BOC and AC in conventional banking are able to support the achievement of performance (liquidity and profitability). This should be maintained and improved. Secondly, supervision is needed to manage distributing of sharia financing. Islamic banking has two indicators that play a role in the formation of credit risk, namely LLP and APB ratio. Both of these have the potential to reduce liquidity and profitability. Thirdly, it is necessary to trade-off for the management ofiIslamic banking in managing their liquidity because the increase in liquidity has the potential to reduce profitability.

CONTRIBUTION
There are several contributions to the literature. Firstly, supporting agency theory (Jensen & Meckling, 1976), that mechanism of corporate governance could influence performance, in conventional banking toward liquidity and profitability, whereas in islamic banking toward liquidity. Secondly, supporting ancipated income theory (Prochnow, 1949), that an increase in credit risk in islamic banking will reduce liquidity. Thirdly, support the research concept of Lata, (2014), Musyoki andKadubo, (2012), Tabari et al., (2013) and Kodithuwakku, (2015) that on conventional and islamic banking, credit risk could decrease profitability. Fourthly, the effect of liquidity on profitability in islamic banking supported trade-off theory.

CONCLUSION
It can be concluded that research on conventional banking showed that corporate governance could affect performance both liquidity and profitability, while in islamic banking, corporate governance could affect performance especially liquidity only. In general, the result of this study support agency theory.
Then credit risk in conventional and islamic banking could affect liquidity, but in a different direction. On islamic banking, an increase in credit risk will tend to reduce liquidity which is in accordance with anticipated income theory. However, this needed attention from regulator and management of islamic banking because the LLP and APB ratios are two important indicators of credit risk variable which can potentially reduce liquidity.
Other research results is credit risk could affect profitability with same direction both of conventional and Islamic banking. An increase in credit risk will tend to reduce profitability. This can be understood because an increase in credit risk will reduce bank income.
The last result is liquidity could affect profitability both conventional and islamic banking but with different direction. High liquidity for conventional banking was able to support the achievement profit, but for islamic banking, high liquidity tends to reduce profit.
The condition of Islamic banking is in accordance with the trade-off theory so it needs to get the attention of regulators and management. The results of the study as a whole provide that in conventional banking, collaboration between corporate governance, credit risk and liquidity can affect profitability, whereas in islamic banking, collaboration between credit risk and liquity can affect profitability.

LIMITATION AND SUGGESTION
Firstly, there are indicators that have negative values or too small in loading estimate or weight estimate so they cannot be used for explained the variable even there is only one indicator that can explain the variables. Some examples are ACA indicator in conventional banking and ROA indicator in conventional and islamic banking. This is due to the NPL and LLP indicators on conventional banks have negative value in weight estimate. Likewise, ROE and NIM indicators in conventional banking are negative and too small in weight estimate, causing only ROA indicators to be used to explain profitability variable. In future research, it can add other indicators to the variables. This is to anticipate the possibility of indicators that are negative value or too small.
Secondly, there is different result impact corporate governance on profitability between conventional and islamic banking. It provide opportunity for further research to study in more depth better. Further research can do qualitative research or add other indicators. Some important indicators for further studies are educational background, risk oversight committee, concurrent positions in other companies, syariah advisory board.
Thirdly, there is different direction impact credit risk on liquidity between conventional and islamic banking. It provide opportunity for further research to study in more depth better why on islamic banking supports the theory of anticipating income, but not on conventional banking.
Fourthly, there is different direction impact liquidity on profitability between conventional and islamic banking. It can also be continued with further studies.