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

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

Abstract

Since it was first operating in 2005 until 2017, Indonesia Deposit Insurance Corporation (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’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.

Suggested Citation

  • Suwandi Suwandi & Noer Azam Achsani & Dedi Budiman Hakim & Halim Alamsyah, 2019. "Bank Failure Prediction Model Based on Governance: A Case of Rural Banks in Indonesia," Asian Social Science, Canadian Center of Science and Education, vol. 15(10), pages 1-49, October.
    • Handle: RePEc:ibn:assjnl:v:15:y:2019:i:10:p:49
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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