MSME lending and bank efficiency: Evidence from Indonesia

Irfan Adhityo Dinutistomo, Arief Wibisono Lubis

Research output: Contribution to journalArticlepeer-review

Abstract

Banks prefer to lend to bigger clients for a variety of reasons, including transaction costs and risk considerations. Due to this phenomenon, the Central Bank of Indonesia issued a regulation that requires banks to channel a minimum proportion of their credit portfolio to micro, small, and medium enterprises (MSMEs). Nevertheless, the impact of channeling funds to MSMEs remains a subject of controversy, in part depending on the dimensions and metrics used. This study examines how MSME lending affects the efficiency of banks in Indonesia, a country where MSMEs constitute more than 99% of business entities. Using a total of 175 panel data observations of banks in Indonesia from 2014–2018, banks’ cost efficiency is first estimated using a stochastic frontier approach (SFA). Panel data regression is used to examine the impact of MSME lending on efficiency. The result of this study shows a significant and positive impact of the proportion of MSME lending on bank efficiency, which indicates that requiring banks to channel funds to MSMEs does not only potentially support economic development, but also is beneficial from the business perspective in the Indonesian context.

Original languageEnglish
Pages (from-to)93-103
Number of pages11
JournalBanks and Bank Systems
Volume16
Issue number3
DOIs
Publication statusPublished - 15 Sep 2021

Keywords

  • Bank
  • Cost efficiency
  • Indonesia
  • MSME lending
  • Stochastic frontier approach

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