The Role of Competition and Size on Zombie Rural Banks in Indonesia

ABSTRACT Objective: This study aims to identify and analyze rural banks catgorized as “zombie”, by exploring the relationship between comptitiviness level and bank size with the risk of rural banks becoming zombies. Methodology: This study uses data from rural banks spanning from 2015 to 2022 and applies logistic regression analysis on balanced panel data. Findings: The findings indicate that increasing competitiveness among rural banks reduces the likelihood of these banks becoming zombies, while larger bank size increases this risk. Specifically, a 1 percent increase in competitiveness decreases the probability of rural banks becoming zombies by 15-17 percent, whereas a 1 percent increase in bank size can increase this probability by 29-88 percent. Province-level analysis also identifies specific provinces that strongly influence influence zombie information. Robustness tests using the Panzar–Rosse H-Statistic confirm the negative competition effect, although statistical significance is concentrated in one zombie definition, thereby validating the main results. IV estimates that use provincial banking density as an instrument indicate that potential endogeneity is limited and does not materially bias the conclusions. Moreover, the competition effect is markedly stronger on the island of Java, and Banten emerges as a provincial hotspot for zombie rural banks, underscoring geographic heterogeneity in the phenomenon. Theoretical and/or Methodological contribution: This study expands existing literature by considering regional differences and exploring the impact of competition, bank size on rural banks within and outside the island of Java. Research/ Practical Implications: The findings of this study have implications for policymakers and regulators to carefully monitor rural banks and enhance regulation and supervision to mitigate the risk of zombie bank formation. Additionally, the insights provided can be implemented to improve the stability and sustainability of the banking sector. Keywords: Rural bank; zombie; competition; size, instrumental variable