PROCYCLICALITY AND BANK LENDING BEHAVIOR IN INDONESIA: THE CASE OF DUAL BANKING SYSTEM

  • Muhammad Rizky Prima Sakti Universiti Teknologi Malaysia (UTM) Kuala Lumpur Campus. Islamic Economics Forum for Indonesian Development (ISEFID) http://orcid.org/0000-0001-8717-1838
  • Mohamed Zulkhibri Islamic Research and Training Institute, Islamic Development Bank, Jeddah Saudi Arabia https://orcid.org/0000-0003-4136-1411
Keywords: Procyclicality,, Bank Lending, Dual Banking System, GMM, Indonesia

Abstract

It is widely suggested in the literature that procyclicality of bank lending behavior may lead to financial instability. 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 for 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 Indonesia banking system.

Author Biographies

Muhammad Rizky Prima Sakti, Universiti Teknologi Malaysia (UTM) Kuala Lumpur Campus. Islamic Economics Forum for Indonesian Development (ISEFID)
Phd Student, Universiti Teknologi Malaysia (UTM) Kuala Lumpur Campus. Researcher, Islamic Economic Forum for Indonesian Development (ISEFID). Scopus ID: 57192068514
Mohamed Zulkhibri, Islamic Research and Training Institute, Islamic Development Bank, Jeddah Saudi Arabia

Senior Research Economist, Islamic Research and Training Institute, Islamic Development Bank, Jeddah,

Saudi Arabia. 

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Published
2018-08-28
How to Cite
Sakti, M. R. P., & Zulkhibri, M. (2018). PROCYCLICALITY AND BANK LENDING BEHAVIOR IN INDONESIA: THE CASE OF DUAL BANKING SYSTEM. Journal of Islamic Monetary Economics and Finance, 4(1), 23 -38. https://doi.org/10.21098/jimf.v4i1.921
Section
Articles