Related Lending and Bank Performance: Evidence from Indonesia

Miki Hamada and Konishi Masaru

No 229, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: After the Asian financial crisis of 1997, it was confirmed that banks lend to their related parties in many countries. The question examined in this article is whether related lending functions to alleviate the problems of asymmetric information or transfers profits from depositors and minority shareholders to related parties. The effects of related lending on the profitability and risk of banks in Indonesia are examined using panel data from 1994 to 2007 comprising a total of 74 Indonesian banks. The effects on return on asset (ROA) varied at different periods. Before and right after the crisis, a higher credit allocation to related parties increased ROA. In middle of the crisis, it turned to negative; and this has also been the case in the most recent period as the Indonesian economy has normalized. Effects of related lending on bank risk measured by the Z-score and non-performing loan is not clear. After undergoing bank restructuring, related lending has decreased and the profit structure of banks has changed.

Keywords: Banks; Loans; Industrial management; Indonesia (search for similar items in EconPapers)
JEL-codes: G21 G38 O1 O16 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-eff and nep-sea
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Citations: View citations in EconPapers (6)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 229. 2010-03

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