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

Author

Listed:
  • Zulkhibri, Muhamed

    (The Islamic Research and Teaching Institute (IRTI))

  • Prima Sakti, Muhammad Rizky

    (Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia)

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.

Suggested Citation

  • Zulkhibri, Muhamed & Prima Sakti, Muhammad Rizky, 2018. "Bank Lending Behavior and Business Cycle in Dual Banking System: Evidence from Indonesia," Working Papers 2018-3, The Islamic Research and Teaching Institute (IRTI).
    • Handle: RePEc:ris:irtiwp:2018_003
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    Keywords

    Procyclicality; Bank Lending; Dual Banking System; GMM; Indonesia;
    All these keywords.

    JEL classification:

    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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