Bank Performance and Its Underlying Factors: A Study of Rural Banks in Indonesia

Abstract

This study determines the effect of variables recommended by the central bank of Indonesia on the performance of rural banks (BPRs) which has the particularity that serve the needs of communities in rural areas, small and medium enterprises (SMEs) in the form of deposits (savings and time deposits) and credit. The analysis technique employed in this study is panel data regression using expenses ratio (BOPOs), capital adequacy ratios (CAR), nonperforming loans (NPLs), loan-to-deposit ratios (LDRs) as independent variables. Return on asset (ROA) and net interest margin ratio (NIM) are used as the proxies of BPRs performance. The data used are from 164 BPRs operating in Java island between 2009 and 2012 period (totaling 656 company years). The results showed that BOPOs and NPLs played crucial role in explaining the BPR performance in Indonesia. The findings in this study indicate that efficiency and prudence in management policies for banking industry in Indonesia becomes more important.