This empirical research investigates the impact of green credit policy, bank specific factors, industry-specific factors, and macroeconomic variables on bank profitability using a balanced panel dataset comprising 43 Indonesian commercial banks from 2003 to 2021. The study aims to contribute to the existing literature on banking. The findings reveal several significant relationships by employing a fixed effect model for estimation. Specifically, bank size, capital, diversification, bank competition (measured by the Boone indicator), and inflation positively influence metrics such as return on assets (ROA), return on equity (ROE), net interest margin (NIM), and pre-tax profit (PBT). Conversely, an increase in market power, as indicated by the adjusted Lerner index, is associated with a decrease in NIM. The introduction of green credit policy has a positive and significant effect on ROE, NIM, and PBT, indicating that considering environmental factors in credit decisions does not impede banks’ ability to channel credit; instead, it helps attract quality customers. The study finds that liquidity risk, loans to deposits ratio, and cost efficiency significantly and positively impact NIM. These three variables are interconnected, as increased liquidity risk due to higher loan to-deposit ratios is expected to lead to increased cost efficiency and, ultimately, enhanced bank profitability. Finally, the analysis reveals risky loans negatively and significantly influence ROA, ROE, NIM, and PBT. Overall, this research contributes valuable insights into the relationships between green credit policy, bank-specific factors, industry-specific factors, macroeconomic variables, and bank profitability in the Indonesian context. The results provide implications for policymakers and practitioners in the banking industry, highlighting the importance of considering environmental factors in credit decisions and emphasizing the significance of managing liquidity risk, loan-to-deposit ratios, and cost efficiency to enhance profitability. The study’s findings warrant further attention and exploration in future research.
