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CHAPTER 1

1.1 INTRODUCTION

The word "bank" comes from the Italian word "banca," which means

"money exchange office." A bank is an institution established as a financial intermediary with the power to accept deposits, lend money, and issue promissory bills, also known as banknotes.

“Banks or financial institutions have different capital structures from other companies” (Jumingan, 2009:239). Banks have a role as a company that sells financial services to the entire community, this entire community includes the government, the world or businesses and individuals. Banks have a function to finance all development projects with the aim of developing industry in the context of equitable development, economic growth, and national stability, to raise people's standard of living in the form of loans or the provision of funds so that they can finance development projects.

“A bank is an agency or institution that accepts credit” (Pierson). Banks receiving public funds in the form of deposits, demand deposits, time deposits, and savings deposits. Public funds are then managed by converting them into investments and loans to private business entities, governments, or individuals.

The company uses the number of debt and/or equity to finance its operations and to obtain company assets, which is called the capital structure.

This structure is usually expressed or represented by the debt-to-equity ratio.

The capital structure serves as a decision-making tool for management in determining the financing of the long-term company. The basic accounting equation is closely related to the capital structure. The equations are:

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Assets = liabilities (debt) + equity (capital)

The capital structure only covers the liability (debt) + equity (capital).

Managers must balance debt and equity to determine the optimal capital structure for banks. Debt and equity are used to finance a bank's activity business, capital expenditures, acquisitions, and the other investment related to bank business. Companies must make sacrifices when deciding between increasing debt and equity when determining capital structure.

1.2 BACKGROUND OF THE STUDY

In Indonesia, banks are regulated by Law No. 7 of 1992 on Banking, as amended by Law No. 10 of 1998 “Banks act as financial intermediaries, on- lending funds from households (in the form of deposits) and distributing them to investors and borrowers”. Many countries have focused on improving the banking sector and financial intermediation because this is important to achieve good economic growth and also to be able to develop the financial industry.. “As a result of developments in the financial sector, individuals tend to save more and turn these savings into investments” (Boujlil et al., 2020; Zirek et al., 2016).

“Banks play an essential role in the economy as capital providers" (Ching et al, 2016). Banks play an important role in providing capital to all real productive sectors. This role is becoming increasingly important in the development of national economies. The following table lists the type of bank’s in Indonesia that registered with the Otoritas Jasa Keuangan (OJK):

Table 1.1 Banks in Indonesia

No Type of Bank Total Banks

1 Commercial Bank 4

2 Private Bank 68

3 Bank Pembangunan Daerah 27

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4 Bank Branch Offices Established Abroad 8

Total Bank 107

Selected as sample 10

Source : Otoritas Jasa Keuangan (OJK)

Malaysia's financial system includes bank brokers, insurance companies, and capital market brokers. The bank brokers can be divided into two groups. The first group is supervised by the Central Bank of Malaysia (BNM). This includes commercial banks (including Islamic banks), investment banks (which are jointly regulated with the Securities Commission), and development finance institutions (FFIs). The second group, supervised by many departments and institutions, are nonbank financial institutions, such as credit cooperatives, other DFIs, and construction and loan cooperatives. BNM supervises insurance companies. BNM also regulates foreign exchange and money markets and supervises payment systems. Capital market intermediaries are managed by the Securities Commission and include fund management companies, broker-dealers, investment banks, and the securities and derivatives market. There is also an offshore financial center in Labuan, supervised by the Labuan Financial Services Authority and engaged in offshore banking, insurance, trust, and fund management. Business activities in Labuan are conducted in foreign currencies (not ringgit). The following table lists the type of bank’s in Malaysia that registered with the Bank Negara Malaysia Central Bank of Malaysia :

Table 1.2 Banks in Malaysia

No Type of Bank Total Banks

1 Commercial Bank 26

2 Islamic Bank 17

3 Investment Bank 1

Total Bank 44

Selected as sample 11

Source : Bank Negara Malaysia

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The Bank of Thailand was founded in 1942 during World War II. As a central bank, it regulates the minimum reserve requirement ratio of commercial banks and lends to commercial banks as a lender of last resort. It acts as both a bank and a state bank. All items on the Bank of Thailand's balance sheet are gradually increasing, demonstrating the rapid development of the banking system.

The Bank of Thailand acts as a bank for the government, as evidenced by government deposits and as a bank for banks, as evidenced by bank deposits. On the asset side, gold and foreign exchange are used for international payments and issuance, much like banknotes. Loans to the central government and commercial banks form the Bank of Thailand's lending business. The following table lists the type of bank’s in Thailand that registered with the Bank of Thailand:

Table 1.3 Banks in Thailand

No Type of Bank Total Banks

1 Central Bank 1

2 State-owned Bank 6

3 Commercial and Retail Bank 14

4 Foreign Bank with Bangkok Branch 14

5 Representative Offices in Thailand 32

Total Bank 67

Selected as sample 8

Source : Bank of Thailand

1.3 PROBLEM STATEMENT

The bank's primary function is to collect funds from the public in the form of deposits, demand deposits, deposits and redistribute these funds in the form of credit loans, securities, placements with other banks, and so on. The more the bank is trusted by the public, the more funds the bank can raise. "Capital structure plays an important role in the use of various sources of funds that will be used to

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finance an investment and also to support the company's operations in an effort to increase company profits and achieve high company value" (Gitman, 2009).

Many empirical studies have to test the capital structure of bank model in developing countries. Most of these studies have been conducted to identify the factors that influence capital structure choice. The empirical results are not consistent in solving capital structure issues in financing decisions. Many factors lead to different research results, such as differences in sample, variables, and differences in scope.

1.4 RESEARCH OBJECTIVE

The purpose of this study is to examine bank spesific determinant on capital structures of bank in Indonesia, Malaysia and Thailand. The objective of this study is to determine whether size, profitability, and risk influence leverage of bank in Indonesia, Malaysia and Thailand

Specifically, however the study examines the following:

1. To examine size between leverage

2. To examine profitability between leverage 3. To examine risk between leverage

1.5 RESEARCH QUESTION

The study conducted within this paper aims to solve the following research questions:

RQ1: Does size influence to capital structure?

RQ2: Does profitability influence to capital structure?

RQ3: Does risk influence to capital structure?

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1.6 SIGNIFICANCE OF THE STUDY

“The capital structure plays an important role in using various sources of funds that will be used to finance an investment and support the company's operations to increase company profits and achieve high company value.”

(Gitman, 2009). It is necessary to know the factors that influence the capital structure. The objective is that these factors can be taken into account in determine the capital structure of bank without affecting the bank's activity.

This study aims to investigate the bank-specific determinants of the capital structure of banks in Indonesia, Malaysia, and Thailand. This study examines the factors that influence capital structure choices, such as size, profitability, and risk.

In determining the capital structure, the decision is influenced by several factors. In addition, there is a need for further research on several other variables that may affect the decision on the choice of capital structure in banking. By analyzing these factors, the bank will be able to maximize its capital structure so that it can maximize value in the end.

1.7 SCOPE OF STUDY

The scope of the study is limited to a sample of public listed banks in Indonesia, Malaysia and Thailand. There are 218 Banks. The selection of samples used with certain considerations, with the aim of getting a representative sample in accordance with predetermined criteria. A bank that has complete data needed to be processed covering the period 2012-2021. Banks that are included in the category 29, which is 10 Bank’s of Indonesia, 11 Bank’s of Malaysia and 8 Bank’s of Thailand.

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1.8 SUMMARY OF THE CHAPTER

This chapter consists of seven subthemes. The first subtopic is the introduction. The main purpose of the introduction is to explain what the topic of the thesis is and what the focus is. Is about explaining to the reader what this study is mainly about. The research background includes a general overview of the research topic and an introduction to the ideas used in the research. It also mentions the research disciplines, current research, and support to assist the dissertation research. The problem statement is a clear statement of the problem area and the conditions that need to be improved. It is a problem that needs to be solved and addressed. This study aims to find out whether size, profitability, and risk affect the capital structure of Indonesian, Malaysian, and Thai banks. The research questions are the core of a research project. They focus on the research, and the methodology and guide all phases of the research. In this study, the importance of the study is to investigate what factors affect the capital structure of banks in Indonesia, Malaysia and Thailand, and by analyzing these factors, the bank will be able to maximize its capital structure so that it will end up maximizing the value of the bank in question. The last point is the scope of the study. The scope of the study refers to the elements that will be addressed in a research project. It defines the boundaries of the research. The sample of this study includes public listed banks in Indonesia, Malaysia and Thailand that has complete data needed to be processed covering the period 2012-2021.

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