PROCYCLICALITY AND BANK LENDING BEHAVIOR IN INDONESIA: THE CASE OF DUAL BANKING SYSTEM
Abstract
It is widely suggested in the literature that procyclicality of bank lending behavior may lead to financial instability. This study examines bank-lending channel over the business cycle for Indonesian dual banking system by ascertaining to what extent Islamic banks have a role in the credit smoothing. In this context, we utilize Indonesian dual banking system unbalanced panel data for the period 2001-2015. By employing two-step dynamic GMM estimators, the study shows that the bank lending behaviour are procyclical. However, when we categorize the lending behaviour into conventional and Islamic banks, the cyclicality of bank lending affects only for conventional banks. As for the Islamic banks, the business cycle does not affect their financing decision. Specifically, large Islamic banks are more counter-cyclical in their financing behavior than small and medium size Islamic banks. Robustness tests using different measures of loans and model specifications confirm the results that Islamic bank is more stable and less procyclical in the case of Indonesia banking system.
References
Abdul-Rahman, A., Abdul Latif, R., Muda, R., & Abdullah, M. A. (2014). Failure and potential of profit-loss sharing contracts: A perspective of New Institutional, Economic (NIE) Theory. Pacific Basin Finance Journal, 28, 136–151. http://doi.org/10.1016/j.pacfin.2014.01.004
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D
Ascarya, Rahmawati, S., & Karim, A. A. (2016). Testing the procyclicality of Islamic and conventional banks in Indonesia. In: Zulkhibri, M., Ismail, A., & Hidayat, S. (eds). Macroprudential Regulation and Policy for the Islamic Financial Industry. Cham: Springer. https://doi.org/10.1007/978-3-319-30445-8_8
Aysan, A., Disli, M., & Ozturk, H. (2016). Financial crisis, macroprudential policies and depositor discipline. The Singapore Economic Review, 62(1), 5-25. http://doi.org/10.1142/S021759081740001X
Azmat, S., Skully, M., & Brown, K. (2015). Can Islamic banking ever become Islamic? Pacific-Basin Finance Journal, 34, 253-272 http://doi.org/10.1016/j.pacfin.2015.03.001
Bank Indonesia (2015). Monthly Statistics Report, Indonesian Islamic Banking. Jakarta: Bank Indonesia.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. http://doi.org/10.1016/j.jbankfin.2012.09.016
Blundell-wignall, A., & Roulet, C. (2014). Macro-prudential policy, capital controls and bank systemic risk. In: Shigehara, K. (eds). The Limits of Surveillance and Financial Market Failure. London: Palgrave Macmillan. https://doi.org/10.1057/9781137471475_9
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8
Buiter, W. H. (2014). The role of central banks in financial stability : How has it changed? World Scientific, 30, 11–56.https://doi.org/10.1142/8720
Chapra, M. U. (2009). The Global Financial Crisis: Some suggestion from Islamic Finance. Kyoto.
Chong, B. S., & Liu, M.-H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125–144. http://doi.org/10.1016/j.pacfin.2007.12.003
Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. http://doi.org/10.1007/s10693-010-0089-0
Farooq, M., & Zaheer, S. (2015). Are Islamic banks more resilient during financial panics? Pacific Economic Review, 20(1), 101–124. http://doi.org/10.1111/1468-0106.12096
Galati, G., & Moessner, R. (2013). Macroprudential policy - a literature review. Journal of Economic Surveys, 27(5), 846–878. http://doi.org/10.1111/j.1467-6419.2012.00729.x
Ghosh, S. (2016). Macroprudential policies, crisis and risk-taking: Evidence from dual banking systems in GCC countries. Journal of Islamic Accounting and Business Research, 7(1), 6–27. http://doi.org/http://dx.doi.org/10.1108/09564230910978511
Hasan, M., & Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(2), 163–200. http://doi.org/10.1142/S1793993311000270
Husman, J. (2015). Essays on Banking and Monetary Policy in the Presence of Islamic Banks. University of Warwick.
Ibrahim, M. H. (2016). Business cycle and bank lending procyclicality in a dual banking system. Economic Modelling, 55, 127–134. http://doi.org/10.1016/j.econmod.2016.01.013
IRTI-Thomson Reuters (2015). Indonesia Islamic Finance Report: Prospects For Exponential Growth. Jeddah: Islamic Research and Training Institute.
Laeven, L., & Valencia, F. (2013). Systemic banking crises database. IMF Economic Review, 61(2), 225–270. https://doi.org/10.1057/imfer.2013.12
Landau, J. (2009). Complexity and the financial crisis. Paper presented at the Conference on The Macroeconomy and Financial Systems In Normal Times and In Times of Stress, Bank of France and the Deutsche Bundesbank, Gouvieux-Chantilly.
Lee, M., Asuncion, R. C., & Kim, J. (2016). Effectiveness of macroprudential policies in developing asia: An empirical analysis. Emerging Markets Finance and Trade, 52(4), 923–937. http://doi.org/10.1080/1540496X.2015.1103137
Louati, S., & Boujelbene, Y. (2015). Banks’ stability-efficiency within dual banking system: A stochastic frontier analysis. International Journal of Islamic and Middle Eastern Finance and Management, 8(4), 472–490. https://doi.org/10.1108/IMEFM-12-2014-0121
Zhang, L., & Zoli, E. (2016). Leaning against the wind: Macroprudential policy in Asia. Journal of Asian Economics, 42, 33–52. http://doi.org/10.1016/j.asieco.2015.11.001
Zulkhibri, M., & Sukmana, R. (2017). Financing channels and monetary policy in a dual banking system: evidence from Islamic banks in Indonesia. Economic Notes, 46(1), 117-14. https://doi.org/10.1111/ecno.12076
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
