Does Foreign Bank Entry Improve Credit Allocation and Lending Rates?: Evidence from Indonesia

Abstract

This study aims to investigate the impact of the existence of foreign banks on the allocation of loans and lending rates in Indonesia. The first part of this study examines the impact of the ownership types of the foreign banks on credit allocation based on borrower types, i.e: corporations and small and medium enterprises (SMEs), and loan currency. In addition, we estimate determinants of lending rate, by taking into account the impact of foreign bank’s modes of entry, bank characteristics, macroeconomics variables, and bank market structure. This study found that foreign banks that enter the Indonesian banking market via Greenfield investments and takeover tend to channel lower proportion of credit for the SMEs. In addition, Greenfield foreign banks provide more loans in foreign currency, a result that can be explained by the notion that foreign banks have better access to world capital market and possibly serve more large firms and foreign clients in foreign currencies. The last result confirms that Greenfield banks in general charge lower lending rates on the credits.