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Advances in Social Sciences Research Journal – Vol. 9, No. 12

Publication Date: December 25, 2022

DOI:10.14738/assrj.912.13511. Panuntun, B. & Sustrino. (2022). Capital Adequacy Ratio and Factors Determinant Study on Islamic Rural Bank in Indonesia.

Advances in Social Sciences Research Journal, 9(12). 414-423.

Services for Science and Education – United Kingdom

Capital Adequacy Ratio and Factors Determinant Study on Islamic

Rural Bank in Indonesia

Bagus Panuntun

Department of Management – Faculty of Business and Economics

Universitas Islam Indonesia - Yogyakarta

Sutrisno

Department of Management – Faculty of Business and Economics

Universitas Islam Indonesia - Yogyakarta

ABSTRACT

Capital for banks is very important because it serves as a reserve to cover if the bank

suffers a loss, so the government determines bank capital as measured by a

minimum capital adequacy ratio (CAR) of 8%. The purpose of this study was to

examine the factors that affect the capital adequacy ratio (CAR). Factors thought to

influence CAR are profitability measured by return on assets (ROA), liquidity risk

measured by financing to deposit ratio (FDR), financing risk measured by non- performing financing (NPF), operating risk as measured by operating expense to

operating income ratio (OEIR), bank size (SIZE) as measured by the natural log of

total assets. The population of this research is Islamic Rural Banks (IRBs) in

Indonesia as many as 165 banks with a sample of 75 banks. Observation period for

6 years (2016-2021) with quarterly data. To test the hypothesis, a panel data

regression analysis tool was used. After testing the model, it turns out that the best

model is the fixed effect model. The results of the research using the fixed affect

model show that profitability and operating risk (OEIR) have no effect on CAR, while

financing risk (NPF) has a significant but positive effect. While FDR has a significant

and negative effect on CAR and Size has a significant and positive effect on CAR.

Keyword: Capital adequacy ratio, profitabilitas, financing to deposit ratio, non- performing financing

INTRODUCTION

Capital is a very important factor for banks, because capital serves to protect depositors from

bank losses due to bank management mismanagement (Rivai, Sudarto, & Veitzal, 2013). Bank

capital is also a back-up if the bank in operation suffers a loss. The importance of bank capital

is so important and in order to support a strong, healthy and stable financial system, the

government through the Financial Services Authority (FSA) regulates bank capital through FSA

Regulation Number 11/PFSA.03/2016 concerning the Minimum Capital Adequacy Ratio for

Commercial Banks. In the FSA regulation, the obligation to provide minimum capital is

determined by a capital adequacy ratio (CAR) of 8%. CAR is measured by comparing bank

equity with risk-weighted assets. In addition, to keep capital safer, banks are required to

provide a capital buffer of 2.5%. Capital adequacy regulations were adopted from the Bassel

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Panuntun, B. & Sustrino. (2022). Capital Adequacy Ratio and Factors Determinant Study on Islamic Rural Bank in Indonesia. Advances in Social

Sciences Research Journal, 9(12). 414-423.

URL: http://dx.doi.org/10.14738/assrj.912.13511

Committee on Banking Supervision, namely BASEL I, II and III which set a minimum CAR of 8%

(Masood & Ansari, 2013).

Banks as business-oriented institutions, the goal is to obtain optimal profits. Bank profitability

Some of it is not distributed to owners, but will be used to increase bank capital, so that higher

profits will increase bank capital. The results of research from Anggareni, Zuhroh, & Suliswanto

(2021), Putra, Asyik, & Fidiana (2020), Abiodun, Abdul-Azeez, & Adewale (2020) and Nuviyanti

& Anggono (2014) also found a positive and significant effect between profitability and capital

adequacy ratio (CAR). However, the findings of (Fauziah & Iskandar, 2015), (Dao & Nguyen,

2020), (Anisa & Sutrisno, 2020), and (Al-Harby, 2019) are on the contrary, profitability has a

negative effect, this is possible because the profits distributed The amount to the owner is so

large that the retained earnings are small which in the end is not able to increase the CAR.

The bank's business is trust, so it must convince customers that the bank can be trusted. In

order to be trusted, banks must be able to maintain liquidity so that if there are customers who

take their funds, they are always available, including providing funds for financing. IRBs

liquidity is measured by the financing to deposit ratio (FDR), where the higher the FDR, the

more funds needed to be disbursed. One source of funds that can be utilized is bank capital, so

that FDR has a negative effect on CAR. This is in accordance with the results of research from

(Nuviyanti & Anggono, 2014), (Mursal, Darwanis, & Ibrahim, 2019), and (Sudiyatno,

Puspitasari, Susilowati, Sudarsi, & Udin, 2019) which found a negative effect between FDR and

CAR. However, some researchers found a positive effect between FDR and CAR (El-Ansary &

Hafez, 2019), (Fauziah & Iskandar, 2015), and (Abusharba, Triyuwono, Ismail, & Rahman,

2013).

The financing provided by the IRBs must be given carefully in accordance with the principles

of providing financing. Banks may not provide as much financing as possible in order to achieve

the target, but must be careful so that all financing is included in the current category. If you are

not careful, you will face financing risk, namely non-performing financing (NPF). The amount

of NPF will reduce profitability because NPF will be treated with costs, so that it will have the

potential to reduce profits which have an impact on decreasing CAR. Thus, the amount of NPF

can reduce CAR. (Risyanto & Soraya, 2021), (Anggareni et al., 2021), (Abiodun et al., 2020), and

(Abusharba et al., 2013) found a negative effect between NPF and CAR. However, (Fauziah &

Iskandar, 2015), (Raharjo, Hakim, Manurung, & Maulana, 2014), and (Nuviyanti & Anggono,

2014) actually found that NPF had a positive effect on CAR.

To increase profits, banks must operate efficiently, because banks in their activities face

operating risks in the form of operating expenses in order to earn profits. Operational risk is

measured by operating costs compared to operating income (OEIR). The higher the OEIR, the

smaller the profit generated, which results in smaller retained earnings so that it will reduce

the CAR. Therefore, IRBs must be able to reduce operating costs as small as possible in order to

obtain large profits. The results of research from (Risyanto & Soraya, 2021), (Dao & Nguyen,

2020), dan (Anisa & Sutrisno, 2020), found a negative effect between OEIR and CAR. However,

there are several studies that found no effect between OEIR on CAR (Anisa & Sutrisno, 2020)

and (Abusharba et al., 2013).

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The size of the IRBs as measured by total assets is not the same, there are IRBs with a large

number of assets and there are small ones. The larger the assets of the IRBs, the greater the

opportunity to provide financing to customers. Thus, large banks have the ability to generate

greater profits. The size of the bank will also increase customer confidence in the bank so that

the funds that can be mobilized will also increase. As the results of research from (Risyanto &

Soraya, 2021), (Setiawan & Muchtar, 2021), (Fauziah, Latief, & Jamal, 2020), and (Aktas, Acikali,

Bakin, & Celik, 2015) which found a positive influence banks with CAR. However, several

studies have found the opposite result, namely bank size has a negative effect on CAR (Usman,

Lestari, & Puspa, 2019), (Thoa, Anh, & Minh, 2020), and (Lihn et al., 2019).

THEORETICAL REVIEW AND HYPOTHESES DEVELOPMENT

Iskamic rural bank (IRBs)

Conditions in Indonesia, most of the population in rural areas are poor households, micro, small

and medium enterprises (MSMEs). They are not covered by banking services, so they cannot

take advantage of the loan services provided by the bank. Even some poor households take

advantage of the services of shadow banks that charge high interest rates. This condition is an

opportunity for IRBs operating in rural areas to provide financing services to poor households

and MSMEs (Priyadi, Utami, Muhammad, & Nugraheni, 2021). IRBs is very important in

developing the rural economy, so it should focus more on financing MSMEs and poor

households (Widarjono, Anto, & Fakhrunnas, 2020).. According to the 2021 Sharia Banking

Statistics, the number of IRBs in Indonesia is 165 IRBs spread across 23 provinces.

Profitability and capital adequacy

Bank as a profit-oriented institution, so that in operating it will optimize profits. The profit

earned will be used to compensate owners in the form of dividend payments and some of it is

not shared (retained earnings) will be used again as additional capital. Thus, higher profits can

increase capital. Profitability can be measured by return on assets (ROA) and return on equity

(ROE). ROA measures the ability to generate profits with all assets owned while ROE measures

the ability to earn profits compared to equity. The results of research from (Setiawan &

Muchtar, 2021), (Anggareni et al., 2021), (Abiodun et al., 2020), dan (Abusharba et al., 2013)

show that profitability as measured by ROA has a positive effect on capital adequacy. .

H1: Profitability (ROA) has a positive effect on capital adequacy

Liquidity and Adequacy of Capital Adequacy

Liquidity in addition to the ability of banks to meet withdrawals of public funds is also the

ability of banks to fulfill financing commitments (Rivai et al., 2013). Liquidity is very important

because it involves public trust regarding the safety of the funds they deposit. Liquidity can be

measured by the financing to deposit ratio (FDR), which is a comparison between the financing

provided and third party funds (Mursal et al., 2019). The higher this ratio, the higher the

financing provided, which of course requires larger funds. The need for large funds for financing

can be met with third party funds, using bank capital. Thus, the higher the FDR, the lower the

capital adequacy ratio. This is supported by (Sudiyatno et al., 2019), (Mursal et al., 2019), dan

(Nuviyanti & Anggono, 2014). Thus the proposed hypothesis is:

H2: Liquidity risk (FDR) has a negative effect on capital adequacy

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Panuntun, B. & Sustrino. (2022). Capital Adequacy Ratio and Factors Determinant Study on Islamic Rural Bank in Indonesia. Advances in Social

Sciences Research Journal, 9(12). 414-423.

URL: http://dx.doi.org/10.14738/assrj.912.13511

Financing risk and capital adequacy

One of the most feared by banks is the non-payment of both principal and yield financing, which

is called non-performing financing (NPF). This NPF will be charged as a cost, so it will reduce

profits. The larger the NPF has the potential to reduce profits, thereby reducing the opportunity

to increase retained earnings and reduce equity. A decrease in equity causes a decrease in CAR,

so that NPL has a negative effect on CAR. (Anggareni et al., 2021) and (Abusharba et al., 2013)

who examined Islamic banks determined the negative effect of NPF on capital adequacy.

Likewise, (Abiodun et al., 2020) and (Abiodun et al., 2020) who examined conventional banks

also found a negative effect between NPL on CAR.

H3: Financing risk (NPF) has a negative effect on capital adequacy

Operating risk and capital adequacy

One of the bank's efforts to increase profitability is to increase bank efficiency. The level of bank

efficiency is measured by the ratio of operating costs to operating income (OEIR). To increase

efficiency, banks must be able to reduce their operating costs. The higher the OEIR the more

inefficient and will reduce profits, because profits are derived from the difference in operating

income minus operating costs. The decrease in profit causes a decrease in equity which in turn

will lower the CAR. This result is supported by (Risyanto & Soraya, 2021) who researched

Islamic banks to find a negative effect between OEIR and capital adequacy. The results of

research on conventional banks also found a negative effect between OEIR and capital adequacy

(Dao & Nguyen, 2020), (Sudiyatno et al., 2019), and (Nuviyanti & Anggono, 2014). Thus the

proposed hypothesis is:

H4: Operational risk (OEIR) has a negative effect on capital adequacy

Bank size and capital adequacy

The size of the bank, which is proxied by the total assets of the bank, shows the size of the bank.

Large banks have the opportunity to be known and trusted by the public and have a higher

ability to channel funds. Thus, large banks must be able to provide higher capital (Fauziah et al.,

2020). Research on Islamic banks found a positive influence between bank size and CAR

(Risyanto & Soraya, 2021) and (Fauziah et al., 2020). The conventional bank research also

found a positive influence between size and CAR (Setiawan & Muchtar, 2021) dan (Aktas et al.,

2015).

H5: Size has a positive effect on capital adequacy

RESEARCH METHOD

Population nd sample

The population in this study is Islamic rural banks (IRBs) in Indonesia, which until now are

1655 banks. Samples were taken as many as 75 IRBs with purposive sampling technique. The

data collection period is for six years from 2016 to 2021 with quarterly data, so that 1,600 data

are collected.

Research variable

This study consists of the dependent variable, namely the capital adequacy ratio (CAR) and five

independent variables consisting of profitability (ROA), liquidity risk (FDR), financing risk

(NPF), operating risk (OEIR), and Bank size (SIZE). The measurement variables are as follows:

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Table 1: Variables and Measurement

Variables Symbol Measurement

Capital Adequacy CAR Equity/Assets weighted risk

Profitability ROA EAT/Total Assets

Liquidity risk LDR Total loan/Third party fund

Financinf rist NPL Non perform loan/Total loan

Operating risk OEIR Operating expense/operating income

Bank Size SIZE Ln Total Asset

Data analysis

The research data is in the form of panel data or a combination of cross section data and time

series data, so to test the hypothesis, panel data regression analysis will be used. There are

three panel data regression models, namely the common effect model (CEM), fixed effect model

(FEM), and random effect model (REM). From the three models, the best model will be selected

with Chow-test, Hausman-test and Lagrange Multiplier or LM-test. The panel data regression

equation is as follows:

CARt-1 = α + β1ROAt-1 + β2FDRt-1 + β3NPFt-1 + β4OEIRt-1 + β5SIZEt-1 + ε

RESULT AND DISCUSSION

Descriptive Statistics

The following is a description of the data from the data tabulation results in the form of

minimum, maximum, and average values.

Table 2: Descriptive Statistics

Variable N Minimum Maximum Mean Std.

Deviation

CAR (%) 1600 8.500 149.500 25.931 1.789.382

ROA (%) 1600 -52.200 109.200 1.878 658.972

FDR (%) 1600 11.180 321.150 91.065 2.764.820

NPF (%) 1600 0.230 75.560 10.107 860.816

OEIR (%) 1600 43.410 286.350 83.561 3.518.667

SIZE (Ln) 1600 5.380 15.150 10.817 113.552

Valid N

(listwise) 1600

Source: Data processed

Table 3 shows that CAR has a minimum value of 8.50%, a maximum of 149.5% with an average

of 25.93%. These results indicate that bank capital is very good because it is above the

minimum requirement of 8% and even reaches more than 25% on average. Profitability (ROA)

shows a minimum value of minus 52.20%, a maximum of 109.20% with an average of 1.88%,

meaning that the profitability of the IRBs is good even though there are IRBs that lose very big.

Liquidity risk (FDR) has a minimum value of 11.18%, a maximum of 321.15%, with an average

of 91.07%. This result shows that the FDR is good, but there are banks that have too low and

too high an FDR. Financing risk (NPF) shows a minimum value of 0.23%, a maximum of 75.56%

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Panuntun, B. & Sustrino. (2022). Capital Adequacy Ratio and Factors Determinant Study on Islamic Rural Bank in Indonesia. Advances in Social

Sciences Research Journal, 9(12). 414-423.

URL: http://dx.doi.org/10.14738/assrj.912.13511

with an average of 10.11%. This result shows that the financing risk is very high because the

minimum NPF is 5%. Meanwhile, the operating risk (OEIR) has a minimum value of 43.41%, a

maximum of 286.35%, with an average of 83.56%. These results indicate that the IRBs has been

operating efficiently because the average is relatively low.

Model Test

In panel data regression analysis, there are three equation models namely Common Effect

Model (CEM), Fixed Effect Model (FEM), and Random Effect Model (REM). To choose the best

model, it is necessary to test the model. Table 3 are the results of the test model.

The first step is to test between CEM and FEM using the Chow-test with the condition that FEM

will be chosen if the p-value <0.05. Table 3 shows the prob. 0.000 < 0.05, thus FEM is better

than CEM. The next step is to choose a model between FEM and REM using the Hausman-test,

provided that FEM will be chosen if the p-value <0.05. The calculation results produce a p-value

of 0.000 < 0.05, so it can be concluded that the best model is the Fixed Effect Model (FEM). The

third step is choosing the best model between REM and CEM using the Lagrange Multiplier test

(LM-test). However, because both test results show the best FEM, the LM-test does not need to

be carried out.

Table 3: The Result of Chow-test and Hausman-test

Type of test Test Summary

Chow-test

Statistic d.f prob

10,8299 99 0.0000

Hausman-test

Chi-sq Statistic Chi-sq d.f prob

38,3248 7 0.0000

Source: Data processed

Panel Data Analysis with Fixed Effect Model

From the results of the model test, it was found that the Fixed Effect Model became the best

model, so that further analysis of the test results from the FEM to be used, as shown in table 4

below:

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Table 4: The Result of Fixed Effect Model

Variable Coefficient Std. Error t-Statistic Prob.

C 3708398. 454403.4 8.161.026 0.0000

ROA 0.031365 0.021070 1.488.604 0.1368

FDR -0.094803 0.014190 -6.681.156 0.0000

NPF 1.574.386 5.439.364 2.894.431 0.0039

OEIR 0.035180 0.019363 1.816.903 0.0694

SIZE 0.083869 0.011345 7.392.369 0.0000

R-squared 0.092697 Mean dependent var 2700583.

Adjusted R-squared 0.088708 S.D. dependent var 1864942.

S.E. of regression 1780304. Akaike info criterion 3.162.745

Sum squared resid 5.05E+15 Schwarz criterion 3.165.434

Log likelihood -25293.96 Hannan-Quinn criter. 3.163.744

F-statistic 2.323.594 Durbin-Watson stat 0.814100

Prob(F-statistic) 0.000000

Source: Data processed

The results showed that the significance level of 0.1368 was greater than the requirement of

0.05, so it can be concluded that profitability has no effect on capital adequacy. Thus the rise

and fall of capital does not affect bank capital. This is probably because IRBs' profits are too

small to be sufficient to be distributed to shareholders as compensation for paid-in capital.

When viewed from the average profit of IRBs, it is still very small and even many IRBs suffer

losses, so that profitability cannot be relied on to increase bank capital. These results are not in

accordance with the results of research from (Anggareni et al., 2021), (Putra et al., 2020),

(Abiodun et al., 2020), and (Nuviyanti & Anggono, 2014) which found a positive effect between

profitability and CAR. However, these results are consistent with (Fauziah & Iskandar, 2015),

(Dao & Nguyen, 2020), (Anisa & Sutrisno, 2020), and (Al-Harby, 2019) who found profitability

had no effect on CAR.

Liquidity risk as measured by FDR produces a significance value of 0.000 which is smaller than

0.05 with a negative coefficient, meaning that FDR has a significant and negative effect on CAR.

The higher the FDR the lower the CAR, the higher the FDR indicates the higher the funds used

for financing. The higher the need for financing, one of the alternative sources of funds comes

from bank capital, so that high financing will reduce bank capital. These results are in

accordance with the results of research (Nuviyanti & Anggono, 2014), (Mursal et al., 2019), and

(Sudiyatno et al., 2019). However, some researchers have found that financing risk has a

positive effect, arguing that the greater the FDR, the greater the financing provided, so that it is

able to generate greater profits and in the end will increase capital (Yolanda, 2017), (Fauziah &

Iskandar, 2015), and (Abusharba et al., 2013).

The results of the financing risk hypothesis (NPF) test result in a significance value of 0.0039

which is smaller than the requirement of 0.05, with a positive coefficient. These results indicate

that the NPF has a significant but positive effect, so it is not in accordance with the hypothesis

which states that the NPF has a negative effect on the capital adequacy ratio (CAR). Judging

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Panuntun, B. & Sustrino. (2022). Capital Adequacy Ratio and Factors Determinant Study on Islamic Rural Bank in Indonesia. Advances in Social

Sciences Research Journal, 9(12). 414-423.

URL: http://dx.doi.org/10.14738/assrj.912.13511

from the descriptive statistical data, the average NPF of IRBs is very high, which is above 10%,

much higher than the minimum requirement of 5%. Likewise, the average CAR shows very high,

which is above 25%, meaning that IRBs' capital is still very large compared to the minimum

requirement of 8%, so that IRBs are less efficient in managing their capital. These results

contradict (Risyanto & Soraya, 2021), (Anggareni et al., 2021), (Abiodun et al., 2020), (Anisa &

Sutrisno, 2020) and (Abusharba et al., 2013) which found a negative effect. between financing

risk and CAR. However, it is supported by (Fauziah & Iskandar, 2015), (Raharjo et al., 2014),

and (Nuviyanti & Anggono, 2014) who found a positive influence between NPF on CAR.

The size of the bank (SIZE) produces a significance value of 0.000 which is smaller than the

condition of 0.05, meaning that the size of the bank has a significant and positive effect on CAR.

These results indicate that IRBs with large assets have a higher opportunity to raise funds from

the public and distribute them to customers. Large banks also have a higher ability to generate

profits so they can increase their capital. These results are in accordance with the hypothesis

and are in accordance with the results of research from (Setiawan & Muchtar, 2021), (Aktas et

al., 2015), (Runtu, Saerang, & Pangemanan, 2017), (Al-Harby, 2019), and (Fauziah et al., 2020)

who found a positive effect of Size on CAR.

CONCLUSIONS AND RECOMMENDATIONS

Based on the results of hypothesis testing and discussion, it can be concluded that there are two

proven hypotheses, namely liquidity risk has a significant negative effect on CAR and bank size

(size) has a positive effect on CAR, and there are two variables that are not significant, namely

profitability (ROA) and operating risk (OEIR). ) so that it has no effect on bank capital, and there

is one significant variable but the coefficient is the opposite of the hypothesis, namely financing

risk (NPF) which has a significant and positive effect on CAR.

These results are expected to be utilized by the management of IRBs in Indonesia in the context

of managing their capital, especially on factors that significantly affect capital adequacy. Capital

is a very important aspect for banks so that capital management must be managed properly

and carefully. These results are also expected to provide additional references for further

researchers, so that they can develop further by adding research variables, both internal and

external factors.

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