THE CORRELATION BETWEEN CAPITAL ADEQUENCY RATIOS AND CREDIT DISBURSEMENT IN COMMERCIAL BANKS OPERATING IN INDONESIA

Abstract

This thesis analyzes the correlation between capital requirements and credit disbursement in commercial banks. As more credit is disbursed in the hopes of generating more income, a bank’s exposure to risk increases; threatening its financial stabilityBanking regulations and practices are both promulgated and advisedby an international financial committee known as the Basel Committee on Banking Supervision (BCBS) in order to ensure effective and efficient maintenance of credit allocation. Among such developed instruments, capital requirements remain the most proliferated baking regulatory model on an international basis. In a crisis scenario, capital reserves are held on retainer in order to cover any potential loss. This capital requirement is quantified through determining and measuring the weight of a bank’s total risk exposure using a designated framework. Howevercapital requirements have also been believed to act as a hindrance for credit disbursement because of its inherent nature to reduce risk. Additionally, capital levels are generally held high above the minimum to allow banks to take on excessive risk by maintaining reasonable leverage. A quantitative research method was used for this study. The tests and analytical techniques used include: coefficient correlation, normality tests, coefficient determination and t-statistic. These aspects need to be explored and investigated in Indonesia. Using these methods the study converged on no significant correlation between the two variables. Based on the considerations above it is deemed fundamental to bring about research through the title of, “The Correlation between Capital Adequacy Ratios(Minimum Capital Requirements) and Credit Disbursement in Commercial Banks Operating in Indonesia.” This research is limited in that it will only be observing banks operating in Indonesia by using a limited amount of data sets (x and y) and limited amount of tests and techniques.