Determinants of Capital Adequacy of Rural Banks in Central Java: The Role of Credit Risk, Allowance for Impairment Losses, and the Mediating Effect of Profitability

Abstract

The implementation of the Indonesian Financial Accounting Standards for Private Entities (SAK EP) in January 2025 and the mandate for Allowance for Impairment Losses (CKPN) under POJK 1/2024 have placed additional pressure on Rural Bank (BPR) performance, particularly regarding the minimum core capital requirement of IDR 6 billion that must be fulfilled by the end of 2024. This study aimed to examine the effects of credit risk (NPL) and CKPN on capital adequacy (KPMM), with profitability (ROA) as a mediating variable in BPRs in Central Java. Firm size, operational efficiency (BOPO), liquidity (LDR), and a time-period dummy variable representing the period before and after CKPN implementation were included as control variables. The population consisted of all BPRs headquartered in Central Java. Using purposive sampling, the sample criteria included total assets of at least IDR 100 billion, complete financial statements, no recorded losses, and data availability. Path analysis and the Sobel test were used for data analysis. The findings showed that, in the first model, CKPN had a positive and significant effect on ROA, whereas NPL had no significant effect. In the second model, KPMM was positively and significantly affected by CKPN and ROA but was not affected by NPL. Furthermore, the Sobel test indicated that ROA did not mediate the effects of NPL or CKPN on KPMM. In conclusion, the new regulation’s provisioning allocation procedures directly strengthened BPR capital resilience and profitability; however, this effectiveness was not achieved indirectly through ROA.