The Core Capital Approach to Board: A Lesson from People’s Credit Banks in Indonesia

Abstract

Mandatory approach to board simply means that a board is a product of regulation and voluntary approach to board just provides general principles to be considered when forming a board. But so far, the existing literature has not yet clearly established the approach for determining the ideal size of a board. This study tries to fill this gap by discussing the core capital approach to the board using small banks in Indonesia known as People’s Credit Banks (PCBs) as a case study. The aims of this study are to analyze the significant contributions of the core capital approach as a theoretical framework toward PCBs’ board and, practically, to evaluate the level of PCBs’ compliance with their board structures based on their core capital and to identify the barriers that prevent PCBs from complying with the required board structures. Applying a mixture of legal doctrinal research and in-depth interviews with key participants from Indonesian Financial Services Authority (IFSA) and the chairperson of National PCBs Associations, this research revealed that theoretically, the core capital approach provides a useful framework as well as a strategic model that significantly contributes to the establishment of a PCBs’ board. However, practically, this research also indicated that PCBs are not yet in compliance with their board structures due to several fundamental barriers. This study also sought to provide some recommendations to overcome the barriers.