Prediction of financial distress in foreign exchange banking firms using risk analysis, good corporate governance, earnings, and capital

Ali Machsum Harahap

doi:10.14414/tiar.v5i1.487

Abstract

The main role of a bank is to collect funds from those who have surplus funds and distribute them to those who have a shortage of funds with the purpose to make benefit from such activity. However, this activity would bring problem when the bank is underfunded or experiencing financial distress due to the customers inability to repay the funds. This study aims to test whether the ratio of non-performing loans (NPL), Loan to Deposit Ratio (LDR), Good Corporate Governance (GCG), and Return on Assets (ROA), Net Interest Margin (NIM) and the Capital Adequacy Ratio (CAR) can be used to predict financial distress in Foreign Exchange Banking Firms in the period 2009-2012. The initial samples in this study are 35 Foreign Exchange Banks, but there are only 16 Foreign Exchange Banks that meet the criteria. The sampling technique used is purposive sampling method and the data used in this study is a secondary data by looking at the financial statements and the related statements of GCG of the Banks. The test equipment used to test the hypo-thesis is logistic regression. These results indicate that the ratio of ROA and NIM can be used to predict financial distress in Foreign Exchange Banks because ROA and NIM have significance value below 0.05 (5%). While the ratio of NPL, LDR, GCG and CAR cannot be used to predict financial distress in Foreign Exchange Banks because NPL, LDR, GCG, and CAR have significance value above 0.05 (5%).

Highlights

The sector of economy is one of the most important sectors in building a country to be a better and even developed country
The source of data is obtained from the official website of Bank Indonesia, namely www.bi.go.id and the official website of the Indonesia Stock Exchange, namely www.idx.co.id
It can be concluded that the first research hypothesis (H1), which assumes that Non-Performing Loan (NPL) variable can be used to predict financial distress, cannot be accepted

Summary

Introduction

The sector of economy is one of the most important sectors in building a country to be a better and even developed country. This is true because the sector of economy is closely linked to financial sector. In this case, there are a lot of established financial institutions, one of them is banking financial institution, or the so-called bank. Banking firms have various service products provided to customers. The services offered can be used by both small and large companies, government agencies, private organizations, and even individuals, where all of them deposit their funds in the banks. Banks must have confidence in the community as a major factor in doing the business

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Results