The Journal of Social Sciences Research ISSN(e): 2411-9458, ISSN(p): 2413-6670 Special Issue. 5, pp: 1035-1039, 2018 URL: https://arpgweb.com/journal/journal/7/special_issue DOI: https://doi.org/10.32861/jssr.spi5.1035.1039 Academic Research Publishing Group *Corresponding Author 1035 Original Research Open Access Financial Performance of Local Government and Social Welfare: The Case in Indonesia Khairudin Department of Economics Universitas Bandar Lampung, Indonesia Rosmiati Tarmizi Department of Economics Universitas Bandar Lampung, Indonesia Indrayenti Department of Economics Universitas Bandar Lampung, Indonesia Aminah Department of Economics Universitas Bandar Lampung, Indonesia Kamaruzzaman Muhammad * Faculty of Accountancy Universiti Teknologi MARA, Malaysia Abstract This study aims to examine the relationship between financial performance and community welfare among the Indonesian local governments. Using content analysis, this study measures the financial performance by utilizing financial ratios such as financial independence, financial effectiveness, financial efficiency, and financial growth whilst community welfare is measured through the Human Development Index (HDI). Based on 146 Indonesian local governments, this study shows that the financial performance and the community welfare in Indonesian local governments are not favorable. This study also shows that financial independence, financial effectiveness and financial efficiency of the local governments are positive significantly affect community welfare. However, financial growth of the local governments has a negative and significant effect on community welfare. This study confirms the stakeholder theory, in which the local governments provide benefits to the stakeholders in the form of community welfare although such benefits has yet to reach the community’s expectations. Keywords: Financial performance; Financial ratios; Community welfare; Local Governments; Indonesia. CC BY: Creative Commons Attribution License 4.0 1. Introduction The local governments in Indonesia play an important role in administering their areas attributed by the Law Number 22 Year 1999 on Regional Government which was later changed into Law Number 32 Year 2004 and updated into Law No. 23 Year 2014 (Vadeveloo and Singaravelloo, 2013). The law stated that all regions at the provincial and district/city levels are given the flexibility to implement regional autonomy. Regional autonomy is the right, authority, and obligations of the autonomous regions to organize and manage their own internal affairs and interests of local communities in accordance with laws and regulations. The granting of regional autonomy through fiscal decentralization and regional authority is expected to provide flexibility to the regions in implementing regional development to improve community welfare (Khusaini, 2006). Improving community welfare can only be achieved if the local government has good financial performance because without funding support, the developmental and the provision of public services activities in order to achieve community welfare improvement will not be able to run well. It means that the local government can improve its community welfare if the local government has improved its financial performance as well (Christy and dan Adi, 2009). However, the facts that occurred in Indonesia showed that the community welfare as measured through Human Development Index (HDI) for the entire Districtor City Local Governments in Sumatera Island increased not more than 1% every year in average, while the realization of District or City income in Sumatera Island increased more than 10% annually in average. It means that the financial growth of District or City Local Governments in Sumatera Island is not accompanied by an increase in the community welfare (Badan Pusat Statistik Republik Indonesia, 2016). This condition indicated that the financial performance of local government has not been effective enough to achieve community welfare improvement. This study aims to examine the relationship between financial performance and community welfare of the local governments in Indonesia. The findings of this study could assist the local governments to increase the local revenue through various channels such as taxes and budgets. The next section, Section 2 presents the literature review and hypothesis development. This is followed by Section 3 that provides the research design and Section 4 presents the results and discussion. The final section, Section 5 summarizes and concludes this study.