Capital adequacy of the banking industry in Indonesia

Abstract

This study analyzes the relationship between credit risk and profitability on the capital adequacy ratio (CAR) of commercial banks in Indonesia. The empirical model result shows that credit risk and profitability performance altogether significantly influence the capital adequacy ratio (CAR). Partially, the variables that significantly influence the CAR are the characteristics and complexity of the bank group. This study also suggests that the pace towards the long-term balance is, in general, less than one year. Capital ratio in the banking industry is 8%, indicating the bank has set aside to anticipate the impact of external factors as well as to comply with Bank Indonesia Regulation Number 15/12/PBI/2013.

The Dynamics of Macroeconomic and Microeconomic Determinants with The Capital of Rural Banks

“…To ensure the full protection on people's deposits, regulator requires banks to maintain a certain level of capital ratios. This occurs due to the fact that the distibutions of deposits from the surplus units to the de ficit units raise certain form of risk, i.e credit risk (Murtiyanti, Achsani, & Hakim, 2015). Therefore, banks need to take some strict measures to ensure the high quality of the ir loan as part of productive assets.…”

“…In the case of capital requirement, Financial Service Authority has the authority. In the case of banks' capital research, almost all research use capital adequacy ratio for the proxy for banks' capital (Bhattarai, 2020;El-Ansary, El-Masry, & Yousry, 2019;Murtiyanti et al, 2015;Phi, Hoang, Taghizadeh-Hesary, & Yoshino, 2019;Shingjergji & Hyseni, 2015;Sudiyatno, Puspitasari, Susilowati, Sudarsi, & Udin, 2019;Thoa, Anh, & Minh, 2020;Vu & Dang, 2020). This is because they use commercial banks as sample.…”

“…This research will also be among the few to investigate how rural banks in Indonesia contribute to the economy through inflation and interest rate target set by central banks. Murtiyanti, Achsani, & Hakim (2015), employed LDR as a representation of loans magnitude of a bank. They posited that bigger loans will require bigger provision that will eventually eradicate capital.…”

“…This prompts attention from regulator to scrutinize the practice of risk management regarding credit risk that a bank is exposed to (Vu & Dang, 2020). Murtiyanti, Achsani, & Hakim (2015), used ROA for profitability in their endeavor to investigate determinants of CAR. They found that particularly two segments of banking indus-try did have positive ROA effect on CAR.…”

Comparative economic value added on Southeast Asian banking industry

“…This causes financial industries were destroyed, with peaks of the crisis was Lehman Brothers filed for bankruptcy on September 15, 2008 so that its impact extends to the whole world (Indonesian Central Bank, 2010). Murtiyanti et al (2015) mentions the importance of capital adequacy of banking industry in Indonesia.…”