MSME lending and bank efficiency: Evidence from Indonesia


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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.

The research was also made possible with the support of PUTI Grant by Universitas Indonesia No. NKB-2036/UN2.RST/HKP.05.00/2020.

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    • Table 1. Summary of hypothesis and testing type
    • Table 2. Variable definitions of cost function
    • Table 3. Variable definitions and descriptions in the efficiency model
    • Table 4. Results of the stochastic cost frontier model
    • Table 5. Descriptive statistics of the efficiency model
    • Table 6. Pairwise correlation of EFF and CIR
    • Table 7. Efficiency model result
    • Conceptualization
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Data curation
      Irfan Adhityo Dinutistomo
    • Formal Analysis
      Irfan Adhityo Dinutistomo
    • Investigation
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Methodology
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Project administration
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Resources
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Validation
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Visualization
      Irfan Adhityo Dinutistomo
    • Writing – original draft
      Irfan Adhityo Dinutistomo
    • Writing – review & editing
      Irfan Adhityo Dinutistomo, Arief Wibisono Lubis
    • Software
      Irfan Adhityo Dinutistomo
    • Supervision
      Arief Wibisono Lubis