How Does Fintech Lending Affect Islamic Local Banks' Efficiency During COVID-19 Pandemic in Indonesia?

Abstract

Fintech lending, also known as peer-to-peer (P2P) lending or online loans, refers to lending provided by non-bank financial technology-based companies that provide financial services by connecting lenders and borrowers on a specific online platform. This paper investigates the impact of fintech lending development on the efficiency of Islamic local banks in Indonesia. Local banks are chosen because they differ from national commercial banks in terms of their characteristics and products, and they also serve limited customers in a specific local area (i.e., provincial level). The presence of Islamic local banks in Indonesia is unique because it fills the gap and has a significant contribution to Muslims who do not have (or do not need) access to larger Islamic commercial banks. This is particularly noteworthy given that Indonesia is the most populous Muslim country. Using a sample of 161 Islamic local banks in Indonesia and provincial-level fintech lending data from 2020Q1 to 2020Q4, we find that fintech development in Indonesia erodes Islamic local banks’ efficiency, suggesting that their presence is significant and could also be damaging for local banks. However, our finding reveals that the negative effects of fintech development can be reduced in banks with higher levels of efficiency. Our results call for policymakers to monitor the development of fintech to maintain a lending ecosystem that can ultimately relate to financial service stability.