his study examines the legal responsibility of Traditional Villages (Desa Adat) in Bali for financial losses incurred by Village Credit Institutions (Lembaga Perkreditan Desa/LPD). Operating at the intersection of customary and state law, LPDs face accountability challenges due to conflicting governance frameworks. Through qualitative methods, including interviews with 35 stakeholders and analysis of legal documents and case studies, the research reveals three key findings: (1) contested interpretations of liability between communal village ownership and formal regulatory standards, (2) the dominance of customary dispute resolution (wicara adat) in handling losses, despite its limitations in ensuring financial accountability, and (3) systemic governance weaknesses, including political interference and inadequate financial controls. The study highlights the tension between preserving cultural authenticity through traditional practices and meeting modern financial accountability requirements. Emerging hybrid solutions, such as community-based audit systems, demonstrate potential pathways for reform. The findings suggest that effective regulation requires "contextual harmonization"—integrating customary norms with essential safeguards like clear liability structures and depositor protection mechanisms. This research contributes to broader discussions on governing indigenous financial institutions globally, emphasizing the need for legal frameworks that balance local autonomy with financial stability. Recommendations include establishing LPD-specific oversight bodies and capacity-building programs to strengthen financial management while respecting traditional governance structures.