Consequences of Bank Governance, Competition and Financial Crisis for Small Business Lending: Evidence from Indonesia

Considering the importance role of Indonesia’s Small and Medium Enterprises (SMEs) in economic development and their highly dependency on bank loan, this thesis attempts to explore whether shocks in Indonesian banking market affect small business lending during 2007–2014. This thesis examines the impacts of bank governance and competition on SME lending by using the Generalised Method of Moment (GMM) estimator and investigates the SME lending cyclicality across bank ownership by employing the Least Square Dummy Variable (LSDV) estimator. The contributions of this thesis are as follow. First, it encompasses both nationally- and locally-owned government banks, and both foreign de novo and acquired banks in the same analysis. Second, this is the first study that examines banks’ SME lending after they went public. Third, it adds to the literature by showing the impact of Indonesian banking competition on SME lending. Fourth, this is the first study that tests the effect of crisis on SME lending across five bank types.

The findings provide support to the role of government banks in correcting the market failure by granting the largest amount of SME loans and more loans in difficult economic times. Meanwhile, private and regional development banks have the highest SME loan shares, highlighting the informational advantage of small-size banks. Their limited capital may nonetheless hinder them from devoting a large amount of loans and drive lending curtailment during crises. The results also confirm the foreign-bank barriers hypothesis, however, foreign acquired banks have better capacity to cater for SMEs that may be attributable to their informational and screening advantages. In addition, the findings show that governance changes of foreign acquisition and initial public offering impair SME lending while those of merger and acquisitions benefits the lending. Furthermore, the findings favour the market power hypothesis of banking concentration and indicate a U-shaped effect of bank’s market power on SME lending.