Abstract
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. AcknowledgmentThe research was also made possible with the support of PUTI Grant by Universitas Indonesia No. NKB-2036/UN2.RST/HKP.05.00/2020.
Highlights
Access to financing is one of the main drivers of business sustainability
This study examines how MSME lending affects the efficiency of banks in Indonesia, a country where MSMEs constitute more than 99% of business entities
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 potentially support economic development, and is beneficial from the business perspective in the Indonesian context
Summary
Access to financing is one of the main drivers of business sustainability. In this case, banks play a vital role in enabling financial access for small-scale companies, as bank financing is one source of financing for micro, small, and medium enterprises (MSMEs). In Indonesia, most enterprises can be classified as MSMEs. According to the Ministry of Cooperatives and SMEs, as of 2018, there are more than 62 million MSMEs in Indonesia, accounting for 99.99% of businesses. According to the Ministry of Cooperatives and SMEs, as of 2018, there are more than 62 million MSMEs in Indonesia, accounting for 99.99% of businesses In terms of their impact on the economy, MSMEs contributed around 60% of Indonesia’s total Gross Domestic Product (GDP) in 2017. MSMEs have a significant contribution to employment, contributing to 97.02% of total employment in Indonesia (Ministry of Cooperatives and SMEs, 2018)
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