TY - JOUR
T1 - MSME lending and bank efficiency
T2 - Evidence from Indonesia
AU - Dinutistomo, Irfan Adhityo
AU - Lubis, Arief Wibisono
N1 - Funding Information:
The research was also made possible with the support of PUTI Grant by Universitas Indonesia No. NKB-2036/UN2.RST/HKP.05.00/2020.
Publisher Copyright:
© Irfan Adhityo Dinutistomo, Arief Wibisono Lubis, 2021
PY - 2021/9/15
Y1 - 2021/9/15
N2 - 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.
AB - 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.
KW - Bank
KW - Cost efficiency
KW - Indonesia
KW - MSME lending
KW - Stochastic frontier approach
UR - http://www.scopus.com/inward/record.url?scp=85116483611&partnerID=8YFLogxK
U2 - 10.21511/bbs.16(3).2021.09
DO - 10.21511/bbs.16(3).2021.09
M3 - Article
AN - SCOPUS:85116483611
SN - 1816-7403
VL - 16
SP - 93
EP - 103
JO - Banks and Bank Systems
JF - Banks and Bank Systems
IS - 3
ER -
