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

Muhamed Zulkhibri and Muhammad Rizky Prima Sakti
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Muhammad Rizky Prima Sakti: Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia

No 2018-3, Working Papers from The Islamic Research and Teaching Institute (IRTI)

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 (search for similar items in EconPapers)
JEL-codes: E59 E69 G29 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2018-05-08
New Economics Papers: this item is included in nep-isf, nep-mac and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:ris:irtiwp:2018_003

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