The impacts of static ownership types and governance changes on small business lending: Evidence from Indonesia

This paper examines the impacts of ownership and governance changes in the Indonesian banking market on small business lending during 2009–2019, for which we apply a state-of-the-art variant of the Generalised Method of Moments (GMM). Indonesia is a particularly relevant context to study due to its relevant population size and economic prominence in the region, whose financial system has been through substantial changes over the last ten years. Our findings indicate that, after the 2015 reform, we do not find strong support for the role of government banks in correcting the market failure by issuing larger shares of SME loans, nor for that of regional development banks, compared to private commercial banks. This would jeopardise the validity, in the Indonesian context, of theories highlighting the informational advantage of small-size banks. In contrast, the results are, in general, robust and most significant for the two types of foreign ownership considered (joint banks and foreign banks), whose commitment to small business lending is low. In addition, considering dynamic effects allows for assessing how banks involved in public offerings or going through consolidation processes might have affected their involvement in small business lending. In this case, results highlight the importance of distinguishing between pre- and post-reform subperiods and the problems of generalising results for all the distribution of small business lending shares.