Determinants of Credit and Financing Risk: Evidence of Dual Banking System in Indonesia

Abstract

Given the fact that banking is the backbone of the Indonesian economy with a dual banking system, this paper seeks the determinants of Non-Performing Financing (NPF) and Non-Performing Loan (NPL) in Indonesia. Various techniques of econometric tools such as unit root, cointegration test and Impulse Response function are utilized with 129 number of observations (January 2004 to September 2014). Variables of capital, rates, loans, output, price, and exchange rate are adopted. The result shows that bank capital is important in influencing the credit and financing risk. Among the recommendations are for the government to maintain economic performance to keep NPF and NPLs as low as possible; and Financing Deposit Ratio-based Reserve Requirement policy (which is adopted only in Indonesia) imposed by the central bank seems to be effective in developing the real sector and should be adopted in conventional banks. This is because this policy “punish” bank which has low Financing Deposit Ratio. This paper covers comprehensive analysis on dual banking system in Indonesia, a country in which banks are the important engine of the economy and a country which has the largest muslim population.