Ownership structure, risk taking, and financial stability of conventional rural banks: evidence from Indonesia

Abstract

Conventional rural banks (CRBs) are the main business partners for MSMEs, contributing significantly to Indonesia’s regional and national GDP. However, weak corporate governance norms often cause financial problems for BPRs, including financial instability as a result of excessive risk-taking. This study investigates how ownership structures, which are the most important components of corporate governance, affect BPRs’ risk-taking and financial stability in West Java and DKI Jakarta, Indonesia. The study included annual panel data from 2016 to 2022, which was estimated using FEM, FGLS, and GMM. The findings show that women’s management ownership and ownership reduce risk while improving financial stability. In contrast, institutional ownership encourages excessive risk-taking, while local government ownership reduces financial stability. Meanwhile, board ownership has nothing to do with risk-taking and financial stability. This is the first study to look at the effects of ownership structures, particularly women’s ownership, on CRB’s risk-taking and financial stability. The study fills a gap in the literature by exploring the relationship between ownership structure, risk-taking, and financial stability. In addition, it provides further insights for banking practitioners, especially CRBs in West Java and DKI Jakarta, Indonesia.