Bank Lending Behavior and Business Cycle in Dual Banking System: Evidence from Indonesia

19 Pages Posted: 15 Oct 2018

See all articles by Muhamed Zulkhibri

Muhamed Zulkhibri

Islamic Research and Training Institute - Islamic Development Bank

Muhammad Rizky Prima Sakti

Islamic Economic Forum for Indonesian Development (ISEFID)

Date Written: May 08, 2018

Abstract

This study examines bank-lending channel over the business cycle for Indonesian dual banking system by ascertaining to what extent Islamic banks have a role in the credit smoothing. In this context, we utilize Indonesian dual banking system unbalanced panel data for the period 2001-2015. By employing two-step dynamic GMM estimators, the study shows that the bank lending behaviour are procyclical. However, when we categorize the lending behaviour into conventional and Islamic banks, the cyclicality of bank lending affects only conventional banks. As for the Islamic banks, the business cycle does not affect their financing decision. Specifically, large Islamic banks are more counter-cyclical in their financing behavior than small and medium size Islamic banks. Robustness tests using different measures of loans and model specifications confirm the results that Islamic bank is more stable and less procyclical in the case of Indonesian banking system.

Keywords: Procyclicality; Bank Lending; Dual Banking System; GMM; Indonesia

JEL Classification: E59; E69; G29

Suggested Citation

Zulkhibri, Muhamed and Rizky Prima Sakti, Muhammad, Bank Lending Behavior and Business Cycle in Dual Banking System: Evidence from Indonesia (May 08, 2018). Available at SSRN: https://ssrn.com/abstract=3263278 or http://dx.doi.org/10.2139/ssrn.3263278

Muhamed Zulkhibri (Contact Author)

Islamic Research and Training Institute - Islamic Development Bank ( email )

P.O. Box. 9201
Jeddah, 21413
Saudi Arabia

Muhammad Rizky Prima Sakti

Islamic Economic Forum for Indonesian Development (ISEFID)

Indonesia

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