International Journal of Business and Management Invention ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X www.ijbmi.org || Volume 4 Issue 12 || December. 2015 || PP-36-44 www.ijbmi.org 36 | Page Determinants of Capital Structure in Indonesian Banking Sector Fenty Fauziah 1 , Rusdiah Iskandar 1 1 Doctoral Program of Business and Economics Faculty, Mulawarman University, Indonesia ABSTRACT : This study aims to analyze and explain determinants of capital structure of the firms. The research object is the banking sector companies listed in Indonesia Stock Exchange for the period of 2012-2014. The Capital Structure (CS) is measured from Debt to Equity Ratio (DER). Dividend Payout is calculated from Dividend Yield. Firm Size is measured by the natural logarithm of total assets. Non Performing Loan (NPL) and Loan to Deposit Ratio (LDR) are used as the indicators of the Firm Risk. The Profitability is determined from the Return on Equity (ROE) and Net Interest Margin (NIM). Firm Growth is calculated using the year-on-year percentage change in total assets. The data analysis is done by employing the Structural Equation Model (SEM) with SmartPLS 3.0. The results show that the Firm Size has insignificant effect to the Dividend Payout but negative significant effect to the Capital Structure. Meanwhile, the Risk has positive significant effect to the Dividend Payout but insignificant effect to the Capital Structure. In one side, the Profitability has insignificant effect to the Dividend Payout but negative significant effect to the Capital Structure. In the other side, the Firm Growth has insignificant effect to the Dividend Payout but positive significant effect to the Capital Structure. Dividend Payout has positive significant effect to the Capital Structure. KEYWORDS – Firm Size, Firm Risk, Profitability, Firm Growth, Dividend Payout, Capital Structure I. INTRODUCTION Capital is the financial foundation of banking industry which supports its operational by providing a buffer to absorb unexpected losses from its activities. If a problem occurred, banks can still operate by using the capital, while the problem is discussed and resolved. Capital structure is the comparison between external capital (long term debt or short term one) and internal capital (retained earnings and equity capital). The decision about the capital structure is the main point in banking industry because it relates with the interests of many parties such as shareholders, creditors and the management of the company. That is why, it must be planned and budgeted for the future operational. If the company has higher debt nowadays, it will charge more interest in the future. In the other hand, if the company issues the equity, the increasing of numbers of shares will push the company to pay more dividend in the future. As the result, the company will have less available cash flow to maintain sustainable growth. Since the authority of the executive in the implementation of policies and operational of the company is substantial, managers have the obligation to make business decision. It is formulated not only depend on the contract from the maximization of shareholder wealth through the creation of profit, but also for their own interests and advantages. This can lead to the so-called agency problem. In general, the existence of asymmetric information can lead the executives to generate real free cash flow for the company, if the negative impact on the company is not harmful to their careers. Another possibility is that the executive can concentrate on the amount of dividends distributed to shareholders. Investors and shareholders do not only act as principal, but also act as consumers. In addition, shareholders also have the right to switch their investments from stocks to obligations issued by the company or switch their investments into other companies. Changes in dividend payments may lead to misunderstandings and even conflict between partners because of distrust and uncertainty on dividend policy. Theoretically, the dividend policy may reach equilibrium solution for both the company and investors. The crisis occurred in 2008 was the impact of the condition of the banking sector in the various countries that deplete the quality of capital. But the banks in Indonesia have shown very rapid progress in terms of asset growth, the type of products offered, as well as the use of information technology. These developments lead to tight competition between banks. This condition will continue, even will increase with the formation of the ASEAN Economic Community in 2015. Only banks with good capital structure will be able to survive. Bank is the largest part of financial institutions in Indonesia. Liabilities related to the regulatory capital are the most important factor in determining the capital structure. Banks generally hold more capital than the minimum capital ratio required by the regulations of Bank Indonesia (BI) as a regulator. The minimum capital requirement for commercial banks stated in the Regulations of Bank Indonesia No.15/12/PBI/2013. The minimum capital of banks is determined in accordance to the specified ratings of the bank's risk profile.