Determinants of Credit Market in Indonesian Banking Industry

Abstract

This study aims to find out determinants of conventional banks' credit supply and demand in Indonesia between 2005 and 2014, a period after recovery from financial crisis in 1997/1998. Some literatures suggest that demand and supply of credit are determined by the rates of credit and bonds. This study contribute to the literature by considering the role of prudential policy, market structure and banks ownership on supply and demand for credits. By using the bank level yearly data, the Seemingly Unrelated Regression model is employed to manage simultaneity between demand and supply of credit. The empirical findings support the literature that in the case of Indonesian banking, demand and supply of credit are determined by the rates of lending yields of bonds and the rates of Bank Indonesia Certificate (Sertifikat Bank Indonesia/SBI). This study also reveals that prudential regulation has even dampened the banks' capability to supply lending. By implication, banks' higher lending capacity could improve their supply of credits. Hence, larger banks are proved to be able to supply more credits than the smaller ones; whereas the demands for credit remain to be substantially determined by the macroeconomic conditions.

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“…For example, Huang (2010) argued that the influence of the legal and regulatory environment was vital for the financial system, and the appropriate enforcement of contract and property rights facilitated bank lending. Similarly, Hasan (2011) and Rahayu et al (2019) further showed that regulatory system enforcement improved contract efficiency, accounting information disclosure and acceptable bank practices, which supported financial system development. Barth et al (2004) noted that restrictions on the activities of financial institutions could be detrimental to bank performance and increase banking failures.…”