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Related Lending and Bank Performance: Evidence from Indonesia

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  • Hamada, Miki
  • Konishi, Masaru

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.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/891/1/ARRIDE_Discussion_No.229_hamada.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 229.

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Date of creation: Mar 2010
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Publication status: Published in IDE Discussion Paper. No. 229. 2010. 03
Handle: RePEc:jet:dpaper:dpaper229

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Related research

Keywords: Banks; Loans; Industrial management; Indonesia;

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Cited by:
  1. Emmanuelle Nys & Amine Tarazi & Irwan Trinugroho, 2013. "Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy," Working Papers hal-00916513, HAL.

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