Does focus strategy work? A study of bank loan portfolios in Indonesia

Abstract

PurposeThe purpose of this paper is to determine the impact of loan concentration on the returns of Indonesian banks and examines whether bank ownership types affect the relationship between concentration and returns.Design/methodology/approachThis research uses heuristic measures of concentration: The Hirschman–Herfindahl index and Deviation from Aggregated Averages are applied to Indonesian banks across all sectors. The data covers the pre and post global financial crises periods from 2003-2011 for 109 commercial banks in Indonesia. Panel feasible generalised least squares analysis was applied.FindingsThe findings show that loan concentration increases bank returns. The positive effect of concentration on returns tends to be more significant for domestic-owned banks. In addition, the interaction effect shows that the positive effect of concentration on returns is less for foreign-owned banks.Research limitations/implicationsThe Indonesian central bank changes to the reporting format of sectoral loan allocation by banks since 2012 in terms of the Indonesian Banking Statistics Details of Enhancement matrix requires separate data analysis for 2012 onwards. The findings of this paper could be enhanced by more detailed data like interest rate expenses and bank level sectoral non-performing loans data.Practical implicationsThe findings suggest that a focus strategy provides better returns. Moreover, bank ownership types is an important factor to consider when setting a bank lending policy.Originality/valueThis paper is among the few studies where different measures of loan concentration in combination with measures of return are applied in Indonesia as an emerging Asian country. The research also provides evidence of the impact of concentration on the interest earnings of the loan portfolios of banks in addition to return on assets and return on equity that are generally applied as measures of return in previous research.