Performance of bank in Indonesia: A comparison between community development banks, government bank and private banks

• Main Authors: Md Rus, Rohani, Taufil Mohd, Kamarun Nisham, Agustin, Hamdi
• Format: Conference or Workshop Item
• Language: English
• Published: Malaysia Finance Association 2011
• Subjects: HG Finance
• Online Access: http://repo.uum.edu.my/3529/1/MFA2011-32.pdf; http://repo.uum.edu.my/3529/; http://www.ukm.my/mfa2011/

A unique characteristic of Indonesian banking system is the existence of community development banks, which is owned by local governments. This study examines the performance of this type of banks compared to private and federal government banks. The sample of this study consists of 15 community development banks, 56 private banks, and 3 federal government banks from 1995 to 2006. Using panel data methodologies, we find that community development banks perform at least as good as the other types of banks. There are two possible explanations for this finding. First, the survival of local government depends on the performance of local banks. Mismanagement of banks might indicate the incompetence of local elected officials. Thus the officials have more incentives to monitor local banks. Second, since community development banks only serve one province, they have specialized knowledge about that province. Third, loans are given out only to civil servants. Since it is very difficult to terminate the employment contracts of civil servants, these loans represent low risk investments to the banks. To our knowledge, this is the first study that looks at the performance of community development bank in comparison with other types of banks in Indonesia.