Abstract
Although social performance is an important target in islamic rural bank, this performance is constrained by various factors of commercialization. This study examined the impact of commercialization factors covering profitability, regulation, and competition on the social performance of rural bank. This research was quantitative that based on a survey on fifty units of rural banks in West Sumatera province of Indonesia from 2016 to 2018. The secondary data collected from the publication of financial services authority and other financial documents at rural banks then analyzed with panel data regression. The findings of this research showed that profitability and competition influenced the social performance, meanwhile regulation could not predict the achievement of social performance. This finding reinforced the previous studies which identified the impact of some commercialization indicators towards the achievement of social performance but there was no regulation’s impact on social performance. The impact of regulation which was originally expected to be able to strengthen the social responsibility mission of rural banks evidently did not stimulate the increase of social performance.
Highlights
Banks are formal microfinance institutions (MFIs), which are always committed providing capital access to micro and small sectors and local communities, especially in rural areas
It can be concluded that the policy to expand the outreach to the community as an effort to improve the social performance of rural banks can be done by strengthening their commercialization factors
The efforts to increase profitability can increase social performance, as well as reduce the prime lending rate. Both of these policies can be best solutions to improve the social performance of rural banks, for making rural banks more than just a profit-oriented financial institution and able to become community banking, especially for poor peoples in rural areas
Summary
Banks are formal microfinance institutions (MFIs), which are always committed providing capital access to micro and small sectors and local communities, especially in rural areas. The rural bank has two types of performance targets, namely financial performance which focus on profitability and social performance which refers to condition about how far the financial institutions able to serve the low-income community (Mersland & Strøm, 2014). Social performance must be in line with financial performance (Amelec & Carmen, 2015), but the problem that often occurs at rural banks is the difficulty in achieving these two targets simultaneously. It was observed that there were several rural banks with the good financial performance or good financial sustainability but only have a small number of clients. There were rural banks that capable enough to extend their outreach with a large number of clients, but their financial performance was not good enough. Some previous studies showed that the two aim of MFIs could be achieved at the same time (Arsyad, 2008; Bassem, 2012; Zerai & Rani, 2012; Gakhar & Meetu, 2013; Qinlan & Izumida, 2013; Lebovics et al, 2016; Caserta et al, 2018)
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