Bank Failure Prediction Model Based on Governance: A Case of Rural Banks in Indonesia

Suwandi Suwandi,Noer Azam Achsani,Dedi Budiman Hakim,Halim Alamsyah

doi:10.5539/ass.v15n10p49

Abstract

Since it was first operating in 2005 until 2017, Indonesia Deposit Insurance Corporation&nbsp;(IDIC) has liquidated 91 rural banks which were determined as failed banks by supervision authority. The cause of the failing of the bank is mainly due to the incapability of the bank to meet the minimum Capital Adequacy Ratio (CAR). Bank&rsquo;s capital was shrunk by the loss caused by fraud. The fraud is mostly induced by the lack of good corporate governance implementation. By using the logistic regression, it can be concluded that (1) the incomplete of responsibility letter which will be used in the event of bank failure, submitted by the bank commissioners; (2) the incomplete of responsibility letter which will be used in the event of bank failure, submitted by the bank directors; (3) role duplication between shareholders and board of directors; and (4) bank had classified as special supervision, have impact on the increase of rural banks failure. At the same time, the compliance level of rural banks to a correct premium payment has impacted to decrease of rural banks failure possibilities.

Highlights

The Financial crisis has happened since centuries and keeps repeating its occurrence in a different period and location
The filtering process of dependent variables was done through stepwise regression model with the result only 5 variables were through as predictor which are double position as shareholders and directors (X1); responsibility letter of directors (X5); responsibility letter of the commissioners (X6); and bank had classified as bank in special supervision (X8), have positive impact on the probability of the failure of the rural banks/islamic rural banks, while the compliance on the premium amount variable (X3) has negative impact of the failure of the rural banks/islamic rural banks
X1 : Duplication of roles of shareholders and directors X3 : Bank compliance on premium payment in an accurate amount X5 : Incompleteness of responsibility letter submitted by directors X6 : Incompleteness of responsibility letter submitted by commissioners X8 : Bank was classified as bank in special supervision

Summary

Introduction

The Financial crisis has happened since centuries and keeps repeating its occurrence in a different period and location. Economic, and banking crisis which took place in 1930 has located in the United States of America (USA) which was widely known as ”the great depression”. Some countries in South East Asia region such as Indonesia, Thailand, Malaysia, Philippines, and Korea had experienced an economic and financial crisis in 1997-1998, where there were a massive bank runs and economic deterioration. In 2008, a global financial crisis had made a comeback and was triggered by a financial crisis that hit the USA and spread worldwide, including Indonesia, which was impacted by the global financial crisis. As a result of the global financial crisis, a deposit insurance corporation was established in many countries

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