The effects of shadow banking on banks' credit consumers

R. Fitriaini & R. Veronica

Parahyangan Catholic University, Bandung, Indonesia

ABSTRACT: Gross regional domestic product (GRDP) of West Java, Indonesia, still relies on household consumption.

1 INTRODUCTION

After the global financial crisis of 2008, despite a downturn, Indonesia's Gross Domestic Product (GDP) aggregate continued to show an upward trend. From the sectoral side, the Central Statistics Agency showed that Indonesia's GDP is still domin­ated by several provinces, one of them is West Java with a composition of 13% of total GDP. In compari­son to the other components, household consumption is the main contributor, representing approximately 60% of West Java's Gross Regional Domestic Prod­uct (GRDP) from 2007-2015. This was followed by exports of goods and services by 25% and gross domestic fixed capital formation by 20%. Further­more, one of the factors driving the development of consumption is credit for consumption purposes. According to Suyatno (2007) credit is a loan made by parties who need funds to financial institutions which serve as a provider of financial services.

However, over time, the problem began to be overcome by the presence of shadow banks. Finan­cial Stability Board (2012) states that shadow banks are non-bank institutions that participate in credit intermediation where activities involve several entities and are conducted outside the regular bank­ing system in whole or in part. In the case of Indo­nesia, entities involved in shadow banking practices include finance companies, insurance companies, mutual funds, securities firms, private equity, hedge funds and savings and loan cooperatives (Kementer- ian Keuangan 2013). Even so, the practice of shadow banking in Indonesia is not as complicated as that in developed countries. The practice of shadow banking is still limited to the activities of finance companies that disburse loans to customers by using several sources of funds (Kementerian Keuangan 2013).

payments. Consumer needs include vehicle finan­cing, home appliance financing, electronic financing, and housing finance. On the other hand, lease is a financing activity in the form of the provision of cap­ital goods, whether under lease with finance lease or an operating lease for use by the lease for a specified period based on periodic payments.

Although the activities of these institutions are still limited in Indonesia, shadow banks can be con­sidered capable of contributing and benefiting the economy. One of which can be seen from the previ­ous explanation that explained how the problem about the difficulty of accessing credit for commu­nity groups that are inadequate to meet the credit­worthiness standard are compensated by the existence of these shadow banks. According to Ghosh et al. (2012), this is because shadow banks have a function that enables these institutions to effi­ciently channel funds to those in need. This state­ment is supported by the results of research Gao (2015) which states that shadow banks can be con­sidered as a source of alternative financing for those who cannot access credit to the banking sector. This is due to how shadow banks offer easier require­ments, more flexible loan amounts, and shorter loan approval times than the banking sector. Thus, the debtor will have a higher willingness to pay for the interest rates on loans than the rates set by commer­cial banks. In addition, when viewed from the con­sumer side, this can also happen, namely because shadow banks are considered “attractive” for con­sumers who are not credit worthy by the bank (Solarz 2013).

Mester et al. (2017) also revealed if shadow banks have three functions in the financial sector, (1) alter­native funding source, (2) investment opportunities in addition to traditional banking, and (3) risk-shar­ing from banking sector instruments. In addition, Barth et al. (2015) found that shadow banks in China are proven to be able to diversify China’s financial sector to provide greater investment and savings opportunities to consumers and businesses across the country. This positively affects economic growth in China. In addition, he also found that there are sig­nificant linkages between shadow banks and com­mercial banks. At the same time, however, shadow bank financial activities can also be a source of sys­temic risk. Based on the Financial Stability Board (2012), it is due to the largest source of shadow banking financing comes from the banking sector, where such an interaction between the banking sector and financing institutions could amplify the systemic risk. In addition, some risks that may come up from shadow banking activities include: the potential for excess leverage, procyclicality amplifi­cation, funding instability and potential bank run, systemic risk transmission, and arbitration regulation (Ghosh et al. 2012).

Based on the explanation above, it can be inferred that finance companies actually have an influence on the economy and indeed have its own “portion” in lending activities to the public. Moreover, in the case of West Java, based on the data from the Financial Services Authority, it can be seen that the total loan portfolio by the finance companies in West Java from 2007 - 2015 is considered to have a fairly high rate, especially in the case of consumption credit. However, to find out whether this situation can affect commercial banks’ business activities or not still remains a question. Thus, this study aims to deter­mine whether there is an influence caused by finance companies to business activities of commercial banks, especially in the case of consumer credit.

2 RESEARCH METHOD

The data used in this study are secondary data from statistical reports on Bank Indonesia, Financial Ser­vices Authority, and Central Bureau of Statistics quarterly time-series from 2007-2015. The unit of analysis of this research is commercial banks and finance companies in West Java. The reason the data beyond 2015 is not incorporated is because there is a change in the rules of the companies’s business activities as well as in the system of consumer lend­ing after 2015. The following is the details of the data sources used in this study (Table. 1):

Table 1. Datatables.

Furthermore, in determining the presence of influ­ence of finance companies on the amount of bank’s consumer credit, this research will use Ordinary Least Square (OLS) analysis technique. It is import­ant to be known that before performing the OLS test, the model used must first be free from violation of classical assumptions.

Information:

KKPt : The amount of consumer credit disbursed by commercial banks (trillion rupiah)

PDRB_t : Total gross regional domestic product (GRDP) (billion rupiah)

TSPt : Consumer credit interest rate (percent)

TSPP_t : Financial companies’s interest rate (percent)

TP_t : Unemployment rate (percent)

ε_t : Error term

3 RESULTS AND DISCUSSION

Table 2. shows the estimated time series model of commercial banks’s consumption credit in West Java in 2007 to 2015.

Based on Table. 2 there is some information that can be known. First, the variable of unemployment rate (TP) and the interest rate of consumption credit of commercial banks (D (TSP)) at alpha level 20 per­cent showed indications that they have a significant influence on the amount of consumer credit commer­cial banks, as shown in p-value of 0.001 and 0.174, respectively. In addition, it can also be seen that the coefficients of TP and D (TSP) have a negative sign

Table 2. Estimation results.

on each coefficient which means that if TP is increased by 1 percent, then the amount of consump­tion credit of commercial banks will decrease by 721.004. Then, if D (TSP) are increased by 1 percent, the amount of consumption credit of commercial banks, the option on it will decrease 1,199.493 bil­lion rupiahs. This might happen when the involun­tary unemployed to total unemployed has a larger portion than voluntary unemployed (Hadad et al. 2004). Furthermore, bank lending rates have a nega­tive effect on the amount of credit of commercial banks. According to Solarz (2013), credit is an exclusive product, so it can only be enjoyed by a group of people. Thus, the possibilities that banks increase their lending rates will make the possibility for deficit units to get loans from commercial banks more limited.

On the other side, although the interest rate of financing company (TSPP) and GRDP of West Java (D (PDRB)) variables have a positive sign, the p- value for the two variables shows an insignificant number. In other words, the TSPP and (D(PDRB)) are proven to positively affect the consumer credit of commercial banks, but not statistically signifi­cant. It is possible that from the consumer side, they consider the financial products produced by banks and financing institutions as a complemen­tary item, so that the increase in interest rates of financial institutions does not significantly affect the amount of bank credit consumption. Mean­while, PDRB does not give a significant effect because the period 2007-2015 is before and after the global crisis, so that economic conditions in West Java were affected. GRDP has a significant positive influence on the amount of credit of com­mercial banks. The changes of GRDP show the level of prosperity through the increase or reduction of society’s income that can represent the pattern of public consumption. This means that the increase of GRDP in a province will be followed with an increase in the amount of credit disbursed by com­mercial banks in order to fulfill the needs of the people in the related province.

In general, the presence of financing institutions should not be threatening for the banking sector since their finance function is limited to provid­ing financing for customers. Provisions for pro­spective borrowers that are determined by financing institutions is considered more lenient than banking requirements, even though it is bal­anced with higher interest rates. Financing eco­nomic activities in Indonesia are still limited to consumer financing, credit cards, leases, and factoring. Thus, the financing institution has the opportunity to become another source for the prospective creditors. Funds disbursed by finan­cing institutions are obtained from equity, exchange, and capital loans from banks. This makes the relationship between financial institu­tions and commercial banks complementary to one another.

3 CONCLUSION

This study aims to determine whether there is an influence caused by finance companies to business activities of commercial banks and how the nature of these influences, especially in terms of consumer credit is. To achieve that, this study used quarterly time-series data from January 2007 to December 2015 which were then processed using Ordinary Least Squares (OLS) analysis technique. The dependent variable used in this study is the amount of consumer credits that are distributed by commer­cial banks, whereas the independent variables used are the interest rate of consumer financing credit, the interest rate of consumer credit commercial bank, the unemployment rate, and the GRDP. The results seemed to indicate that the presence of shadow banks in West Java do not threaten the existence of the commercial banks. This is due to how the activ­ities of shadow banks in Indonesia are still limited to providing loans to debtors. In addition, the largest source of funds disbursed by shadow banks comes from commercial banks. That being said, when the number of shadow bank customers increases, the funds disbursed will also increase, where based on that, the funds lent by commercial banks to financial institutions should also increase. Therefore, the existence of shadow banks leans more towards being complementary rather than threatening the business activities of commercial banks in West Java.

REFERENCES

Aviliani, S.H., Maulana, T.N. & Hasanah, H. 2015. The Impact of Macroeconomic Condition on The Bank's Performance in Indonesia. Buletin Ekonomi Moneter dan Perbankan 17(4): 379-402.

Barth, W., Hulek, K., Peters, C. & Van de Ven, A. 2015. Compact complex surfaces (Vol. 4). Berlin: Springer.

Financial Stability Board. 2012. Strengthening Oversight and Regulation of Shadow Banking: An Integrated Overview of Policy Recommendations. [Online]. Retrieved from http://www.fsb.org/2012/11/r_121118/ Accessed on 2018- 06-27.

Gao, S. 2015. Seeing Gray in a Black-and-White Legal World: Financial Repression, Adaptive Efficiency, and Shadow Banking in China. Texas International Law Journal 50(1): 95-143.

Ghosh, S., Mazo, I.G. & Robe, I. 2012. Chasing the Shadows: How Significant Is Shadow Banking in Emer­ging Markets? Economic Premise 88: 1-7.

Hadad, E., Rav-Acha, M., Heled, Y., Epstein, Y. & Moran, D.S. 2004. Heat stroke. Sports Medicine 34(8): 501-511.

Hofmann C. 2017. Shadow Banking in Singapore. Singa­pore Journal of Legal Studies 18-52.

Kementerian Keuangan. 2013. Peran Penyaluran Kredit Non Perbankan dan Pertumbuhan Ekonomi: Perspektif dari Negara Emerging G20. Jakarta: Badan Kebijakan Fiskal Kemenkeu

Mester, E. Toth, R. & Kozma, T. 2017. Banking Competi­tiveness. Management, Enterprise and Benchmarking in the 21st Century. IV, 258-276.

Muchdarsyah, S. 2000. Manajemen Dana Bank. Jakarta: Bumi Aksara.

Solarz, M. 2013. The Importance of Shadow Banking Sector Entities for Population Affected by Credit Exclu­sion. Copernican Journal of Finance & Accounting 2 (2): 189-201.

Suyatno, S. 2007. Kelembagaan Perbankan. Jakarta: Gra- media Pustaka Utama.