Reformulation of the Role of Regional Development Banks as Agents of Regional Catalyst: The Case of Indonesia

(1)

Volume 26

Number 2 Volume 26 No. 2 (May 2019) Article 3

11-11-2019

Reformulation of the Role of Regional Development Banks as Reformulation of the Role of Regional Development Banks as Agents of Regional Catalyst: The Case of Indonesia

Agents of Regional Catalyst: The Case of Indonesia

Umanto Umanto

Faculty Administrative Sciences, Universitas Indonesia; Indonesia Novita Ikasari

Faculty Administrative Sciences, Universitas Indonesia; Indonesia

Follow this and additional works at: https://scholarhub.ui.ac.id/jbb Recommended Citation

Recommended Citation

Umanto, Umanto and Ikasari, Novita (2019) "Reformulation of the Role of Regional Development Banks as Agents of Regional Catalyst: The Case of Indonesia," BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi: Vol. 26 : No. 2 , Article 3.

DOI: 10.20476/jbb.v26i2.10248

Available at: https://scholarhub.ui.ac.id/jbb/vol26/iss2/3

This Article is brought to you for free and open access by the Faculty of Administrative Science at UI Scholars Hub.

It has been accepted for inclusion in BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi by an authorized editor of UI Scholars Hub.

(2)

Bisnis & Birokrasi: Jurnal Ilmu Administrasi dan Organisasi

International Journal of Administrative Science & Organization, May 2019 Volume 26, Number 2

INTRODUCTION

Development banks have an important role in the economy of a country regardless of their difference in institutional set-up and, consequently, sources of funds. One feature typi- fies development banks is the target of their intermediary role, which is focused on investment projects Ligeti (1985) stated that ownership of development banks might belong to the private sector or to the state, with tasks primarily revolved around infrastructure projects particularly those which financing provisions were not required to be provided by private banks. Similarly, De Aghion (1999) and Ozturk, et.al (2010) stated that development banks are made available by the government in order to provide long-term capital for local industry. Meanwhile, Yeyati, et.al (2004)

recognized two function of development banks, namely to provide financing on strategic but unprofitable projects and to provide banking access to those who are marginalized by commercial banks. The obligation to finance unfavour- able projects was also identified by Ozturk, et.al (2010). In a nutshell, the aforementioned scholars, including Thorne and Du Toit (2009) are in agreement that development banks are important to allow government intervention to ensure financial inclusion is achieved through established financial institution. Meanwhile, Griffith-Jones (2016,) emphasizes the roles of the development bank on five things related to:

: (1) financing long-term investment, (2) helping provide systemic stability, (3) helping develop and deepen financial markets, (4) supporting greater inclusion, and (5) financing public goods. Eurodad (2017) iterated the significance of

Reformulation of the Role of Regional Development Banks as Agents of Regional Catalyst: The Case of Indonesia

Umanto¹, Novita Ikasari²

Faculty of Administrative Science, Universitas Indonesia^1,2 [email protected]¹, [email protected]²

Abstract. Regional development banks (RDB) in Indonesia are constitutionally mandated to be the economic and social catalyst for local development, a role which requires banks to finance ‘unprofitable’ projects. The incompatible functions are resulted in reservations within RDB to maximize their resource allocation potential. This paper is aimed at evaluating RDB’s catalyst role and at proposing a refinement to the current role which would enable RDBs to achieve their expected goals. This research uses descriptive statistics of RDBs’ loan performance from 2012 to 2017 to establish RDBs’ performance in economic and social areas.

Accounts included in this research are third-party funds, productive loans, loan deposit ratio and small business loans. It is evident from the secondary data that RDBs have issues in contributing to local economy generator. Next, data from interviews with senior management team of four RDB’s are analysed to identify critical pillars for formulation of RDBs’ role. Referring to Thorne’s and Du Toit’s framework for development banks (2009) the reformulation of RDBs’ catalyst role starts from stipulating their role in an exclusive and well-defined operating environment. This will allow RDBs to synergize their operations with local development programs. From governance and financial performance perspectives, RDBs can prepare efforts to make an initial public offering as part of a strategy for increasing capital, structuring corporate governance, and enhance corporate value.

Keywords: regional development bank, economic catalyst, loan performance, governance

Abstrak. Bank pembangunan daerah memiliki tugas dalam pengembangan kegiatan ekonomi dan sosial yang dapat mendorong pembangunan daerah. Hal ini berkaitan dengan peran dasar bank pembangunan untuk membiayai proyek-proyek pembangunan yang tidak menguntungkan. Meskipun, dalam konteks Indonesia, bank pembangunan daerah diposisikan sebagai bank umum yang kegiatannya memberikan pelayanan dalam lalu lintas pembayaran. Penelitian ini bertujuan untuk mengevaluasi peran bank pembangunan daerah sebagai agent of regional development dan mengusulkan formulasi baru bagi peningkatan peran tersebut. Penelitian ini menggunakan data kuantitatif seperti pertumbuhan kredit kepada pihak ketiga, penyaluran kredit produktif, loan deposit ratio, dan penyaluran kredit kepada usaha mikro, kecil, dan menengah untuk melakukan evaluasi atas peran bank pembangunan daerah sebagai agent of regional development. Data yang digunakan berasal dari statistik perbankan indonesia dan laporan tahunan bank pembangunan daerah periode 2012-2017. Kemudian, melakukan triangulasi dengan pendapat informan melalui proses wawancara yang dilakukan dengan empat direksi bank pembangunan daerah serta perwakilan dari asosiasi bank pembangunan daerah. Dengan menggunakan kerangka pemikiran yang dikembangkan oleh Thorne dan Du Toit (2009), hasil penelitian menunjukkan bahwa bank pembangunan daerah perlu didudukkan pada tugas dan peran sesuai dengan fungsi dan tugas pokoknya sebagai bank pembangunan. Hal ini memungkinkan bank pembangunan daerah melakukan sinergisitas dengan program pembangunan daerah. Dari prespektif tata kelola dan kinerja keuangan, bank pembangunan daerah dapat mempersiapkan upaya untuk melakukan initial public offering sebagai bagian dari strategi untuk peningkatan modal, penataan tata kelola perusahaan, serta peningkatan nilai perusahaan.

Kata kunci: bank pembangunan daerah, economic catalyst, loan performance, governance

DOI: 10.20476/jbb.v26i2.10248

(3)

commercial bank development in direct financing to develop the financial sector, to promote economic stability, and to improve living standards.

Development banks in Indonesia have gone through significant organizational change over three decades. Indonesian development banks operated in national and local levels.

The Indonesian Development Bank (Bank Pembangunan Indonesia, Bapindo) operated at a national level and was formed by Government Regulation Number 21 Year 1960 on May 25th,1960 (Bank Indonesia, 2007). Bapindo was given a special mandate that was to finance government development projects. Bapindo was later merged with three other state-owned banks namely Bank Bumi Daya (BBD), Bank Dagang Negara (BDN), and Bank Ekspor Impor Indonesia (Bank Exim) as part of the state’s banking sector’s recovery plan that was crushed by Asian economic crisis in 1998. The new bank was called Bank Mandiri established on October 2nd, 1998 with a revised scope of functions to be a commercial bank. It can be said that since 1998, Indonesia recognized only one type of development bank, that is regional development bank (hereafter RDB). On a regional level, the growth of banks took six years from two RDBs in 1959 to 22 banks in 1965. Their establishment and operations were mandated by Law Number 13 Year 1962 on Regional Development Bank. These banks were owned by Local Government and tasked to be the catalyst for regional economy and social development by financing development projects.

Despite their particular developmental role, RDBs are classified as commercial banks per Law Number 10 Year 1998 on Changes in Banking Sector which roles and functions include provisions of payment traffic (Umanto, et.al, 2018). Another important regulation impacting RDBs’

role and function was issued by the Ministry of Home Affairs, The Ministry Regulation Number 62 Year 1999 on Institutional Structure and Operational Guideline, which stipulated RDBs’ role in the development of regional economics and social development. The decree specified three main functions of RDBs, namely: (1) promote economic growth and regional development to improve community’s living standards, (2) regional paymaster and treasurer, and (3) contribute to regional revenue. This placed RDBs exactly in the middle of two strong and powerful authorities with different focus. One is the Central Bank of Indonesia which concerns with RDBs’ growth and sustainability as a financial institution including profit-making capacity and intermediary roles. The other is the Ministry of Home Affair which concerns with the role of RDBs’ public service obligations (PSOs) and translates them into any contributions to social development and higher living standards. This function is in line with the opinion that local financial institutions (espe- cially regional banks) have a role in encouraging regional economic growth (Jayaratne and Strahan, 1995; Guiso, et.al, 2002; Burges and Pande, 2005; Hasan, et.al, 2006; Kendall, 2012).

In order to fulfill the aforementioned roles, RDBs are navigated and monitored by the Central Bank (Bank Indonesia, BI) and later, by the Financial Services Authority (Otoritas Jasa Keuangan, OJK). These supreme financial authorities in Indonesia designed a mid-term program titled Regional Bank Champion (Bank Regional Champion, BRC, from 2010 to 2015) and RDBs’ Transformation Program

(Transformasi BPD from 2015 to present). The BRC was targeted at enabling RDBs to be the leading local bank through competitive products and services and broad network that will be beneficial in their efforts to encourage regional economic growth. The three main tasks for RDBs in this program are: (1) to safeguard and enhance bank’s business resilience, (2) to act as agents of regional development, and (3) to improve the ability to serve communities within the region. The transformation program, however, puts a slightly different focus whereby emphasis is given to RDBs’ competitiveness. It is fair to assume that OJK projects RDBs’ competitiveness as a catalyst to sustainable regional economic growth and equity. In order to achieve this, RDBs are expected to increase their intermediation function, particularly in small business financing. In general, quantitative measurement for RDBs’ as a regional catalyst are: (1) a minimum credit growth of 20% per year, (2) a minimum productive loan portfolio of 40%, (3) Loan to Deposit Ratio (LDR) between 78-100 %, (4) public funds outside the minimum local government funds of 70%, (5) lending provisions to rural credit banks and microfinance institutions through linkage programs, and (6) become APEX banks (protective bank schemes) that support the activities of micro financial institutions, such as people's credit banks or market banks so that they can play an optimal role in the development of micro, small and medium enterprises.

In this context, this study aims to propose a reformulation of the role of RDBs as catalyst of regional development.

Using the framework proposed by Thorne and Du Toit (2009), this paper discusses the new formulation of RDBs’ catalyst role within the context of Transformation Program. The discussion will be based on an evaluation of the aforementioned role at both Regional Champion and Transformation Programs. The comparison serves as the necessary condition to distinguish this study to RDBs’ catalyst role as was dis- cussed in Thorne and Du Toit (2009). The strategic position that RDBs hold spans from supporting local administration strategic policies, financing provisions on projects otherwise cannot be funded by the private sector, and carrying out social missions. On the practical level, the results of this study are providing insights to the role of RDBs’ in ASEAN financial integration framework.

This study uses a concept developed by Thorne and Du Toit (2009) which includes six dimensions that impact the success of development banks. These six dimensions are:

(1) enabling environment, (2) mandate, (3) regulation and supervision, (4) governance and management, (5) financial sustainability, and (6) performance assessment. Enabling environment is related to environmental factors that support the development bank in carrying out its functions and roles.

Factors construe the environmental are socio-economic and needs and priorities in implementing development. A mandate is related to the accuracy of the mandate imposed by the government or regional government (task or role) in order to contribute significantly to development (Thorne and Du Toit, 2009). Regulation and supervision are related to the clarity of the regulations stipulated and supervision carried out by regulators. Thorne and Du Toit (2009) continued to highlight the issue of ownership of development banks that could lead to potential conflict of interest primarily related to the regulation and supervision of the government. Governance and management are related to the principles and the body

(4)

UMANTO, IKASARI, REFORMULATION OF THE ROLE OF REGIONAL 79

of regulations that are aimed at protecting the interests of all stakeholders. It is generally accepted that banks are highly regulated for this particular reason. The main point is for the government to create a balance between the banks’

financial performance, including financial sustainability, and their authority in carrying out functions in accordance with established targets (Thorne and Du Toit (2009). This is related to how to measure appropriate performance which will ultimately contribute significantly to policy-making processes (Thorne and Du Toit, 2009).

In order to limit the scope of the study, this research ultimately focuses on the mandate dimension. The mandate is indirectly related to the tasks or roles carried out by the development bank. Thorne and Du Toit (2009) further states that there are six aspects related to the accuracy of mandates (tasks or roles), namely: (1) mandate clarity, (2) local rel- evance, (3) institutional fit, (4) complementary in funding, (5) flexibility, and (6) appropriate scope. The first aspect is the mandate clarity, where in this case the mandate is given to the regional development bank, should be clearly articulated so that in the end it could provide clarity for the bank and related stakeholders (Thorne and Du Toit, 2009). Thorne and Du Toit (2009) further states that the mandate clarity, in the end, could provide benefits related to the improved account- ability and reduced political aspects in the development bank management. On the other hand, pertaining to the second and third aspects, Thorne and Du Toit (2009) states that the regional development bank generally should be able to adjust to the specific needs of the government (in the context of the regional development bank means related to the needs of the region) relevant to the local and institutional conditions.

Thorne and Du Toit (2009) further explain that related to the second and third aspects, the regional development bank should be able to adjust to the economic, political, and local institutional environment as well as complement other banking institutions. On the fourth aspect, in this case, is funding, the regional development bank places its institution as a part of the financial system in particular country which is then limits its role to the funding of activities that are comparatively excellence and does not receive funding from private sectors (Thorne and Du Toit (2009). The fifth

principle is flexibility, in the essence that the mandate given to the regional development bank could be reviewed following the changes of the environment as well as the effort to adjust to the future conditions (Thorne and Du Toit, 2009).

Finally, the sixth principle is related to the scope of activities of the development bank (Thorne and Du Toit, 2009).

RESEARCH METHOD

In order to address RDBs’ discorded role, first there is a need to establish that RDBs’ shortcoming ability to be regional catalyst is lucid that such reformulation is war- ranted. In this study, a selection of quantitative data was used and analyzed to reduce research bias caused by data sources and research assumptions. The initial stage of this research is carried out by evaluating RDBs’ ability to be the catalyst of regional development. Using quantitative data representing: (1) number of credit growth, (2) the number of productive loans (int the form of working capital loans and investment loans), (3) ratio of loan to deposit (LDR), and (4) portion of micro, small and medium medium enterprises (MSMEs) loans. The data is taken from the Indonesian Banking Statistics Report for the period 2012-2017 and the RDB’s Annual Report from the same years.

Upon the analysis of RDBs’ ability to nurture regional economy and social development, qualitative data from interviews are triangulated and analyzed. Interviews are conducted with strategic management team of RDBs, namely member from Board of Directors of selected RDBs as well as representative of Regional Bank Management Association. Members of Board of Directors include the Director of Compliance of two RDBs and the President Director of two other RDBs. RDBs selected for the study are Bank of North Sumatra, Bank of South Kalimantan, Bank of East Nusa Tenggara and Bank of Jakarta. The selection is based on geographical representativeness to avoid any potential of “central-regional” bias. In the final stage, this study orients the qualitative data towards Thorne and Du Toit’s framework to reformulate RDBs’ role as catalyst of regional development.

Table 1: Descriptive Statistics of Intermediary Performance of RDBs in 2012-2017 (in billion rupiahs)

RESULT AND DISCUSSION

Descriptive Statistics of RDBs Intermediary Performance

In this section, the proxy statistics that are related to intermediary role of RDBs are described. These proxies consist of: (1) total credit, (2) total third-party fund acquisition, (3)

total credit distribution other than credit to the bank, (4) total working capital credit, (5) total investment credit, (6) total consumption credit, and (7) ratio of loan to deposit (LDR).

(2)On average, the third-party funds collected by the RDBs during the 2012-2017 period are totaled to IDR 348,670.17 billion with a minimum credit value of IDR 278,835 billion and the maximum value of IDR 449,389 Source: : Indonesia Banking Statistics December 2017 (processed 2018)

(5)

provision is a miniscule of 8.15%.

(4) Working Capital credit is funds channeled to third parties to support short-term business operations. On average, the working capital loans disbursed by the RDBs during 2012-2017 amounted to IDR 61,184 billion with the minimum value of IDR 45,861 billion and the maximum value of IDR 75,296 billion. Figure 4 confirms that State Owned Banks and Foreign Exchange Commercial Banks (1) On average, the loans disbursed by the RDBs

during the 2012-2017 period were IDR 311,565.17 billion, with the minimum value of credit distribution of IDR 219,207 billion and a maximum value of IDR 393,439 billion. The total credit disbursed is the total amount of credit distributed by RDBs to other commercial banks and to third parties. Of the various group of commercial banks that are operating in Indonesia, loans disbursed by Foreign- Exchange Commercial Banks are superior compared to other type of banks. On the contrary, Non-Foreign Exchange Commercial banks have performed most poorly.

RDBs are placed in the middle of the group in terms of loan billion. The total third-party funds collected are the total amount of funds obtained from both banks and non-banks.

Consistently, Foreign Exchange Commercial Banks have outperformed their counterparts in terms of funds mobilization, with Non-Foreign Exchange Commercial Banks and RDBs remain on their respective position as on the previous indicator (Figure 2).Based on Table 1, the follow- ings can be inferred on the aforementioned performance of commercial banks as well as highest and lowest performer within the group:

Figure 1: Comparison of Commercial Bank Credit Distribution in 2012-2017 (in billion rupiahs)

Source: : Indonesia Banking Statistics December 2017 (processed 2018)

Figure 2: Comparison of Third-Party Funds by Commercial Banks in 2012-2017 (in billion rupiahs)

disbursement (Figure 1).

(2) On average, the third-party funds collected by the RDBs during the 2012-2017 period are totaled to IDR 348,670.17 billion with a minimum credit value of IDR 278,835 billion and the maximum value of IDR 449,389 billion. The total third-party funds collected are the total amount of funds obtained from both banks and non- banks. Consistently, Foreign Exchange Commercial Banks have outperformed their counterparts in terms of funds mobilization, with Non-Foreign Exchange Commercial Banks and RDBs remain on their respective position as on the previous indicator (Figure 2).

(3) The amount of third-party credit (Non-Bank)

shows banks’ ability to channel their funds to working capital loans, investment loans, and consumer loans. On average, the loans disbursed by the RDBs during the 2012- 2017 is totaled to IDR 310,306.33 billion with a minimum amount of IDR 218,851 billion and maximum value of IDR 390,371 billion. Figure 3 shows a slightly different picture where State Owned Banks and Foreign Exchange Commercial Banks channel 78.24% (IDR 2,979,451.67 billion) of the total amount channeled in the six years of IDR 3,808,019.49 billion). RDBs proportion on this Figure 3: Comparison of Third-Party (Non-Bank) Credit Distribution by Commercial Banks in 2012-2017 (in billion rupiahs)

Figure 4: Comparison of Working Capital Credit by Commercial Banks in 2012-2017 (in billion rupiahs)

form 78.88% (IDR 1,426,145 billion) of the total amount (IDR 1,807,954 billion). RDBs performance in working capital credit is categorically week with only 3.38% of the total amount.

(5) Investment credit is funds channeled by commercial banks for investment activities. On average investment loan provisions by the RDBs during 2012- 2017 are IDR 34,330.83 billion with a minimum amount of IDR 24,870 billion and a maximum of IDR 40,889 billion.

From Figure 5, it can be seen that the share for investment credit is dominated by joint-venture banks that comprises 78.97% of the total funds channeled in six years. RDBs performance in investment credit is categorically week with only 1.25% of the total amount.

(6) Consumption credit are financing provided by commercial banks for consumption activities. On

(6)

Figure 5: Comparison of Investment Credit by Commercial Banks in 2012-2017 (in billion rupiahs)

average, total consumption credit channeled by the RDBs in 2012-2017 is amounted to IDR 214,793 billion with a minimum amount of IDR 148,120 billion and a maximum of IDR 274,187 billion. Figure 6 shows that State Owned Banks and Foreign Exchange Commercial banks form 72.57% (IDR 770,029.2 billion) of the total amount (IDR 1,061,128.87 billion). Even more impressive, when RDBs are included in the pool, the portion significantly increases to 92.81%.

(7) LDR reflects the banks’ liquidity and their profit generating ability. On average, the loan-deposit ratio of commercial banks during the 2012-2017 period was 89.02% with a minimum value of 79% and a maximum value of 94%. Figure 7 shows RDBs LDR ratio is less than 1 for over six years, which means the banks are not obtaining maximum profit out of their intermediary activities.

Based on the detailed data presented on Figure 1 to Figure 6: Comparison of Consumption Credit by

Commercial Banks in 2012-2017 (in billion rupiahs)

7, financial indicators of RBDs as catalyst for regional economy and social development show the following findings:

(1) On average, the credit-to-third-parties growth of RDBs in the last five years was 12.37%, which is below the minimum target of 20% achieved within the Regional Champion Program. It is, however, higher than the average growth experienced by banking sector in the same period of 11.95%. Based on year-to-year analysis shown in Figure 8, credit growth of RDBs tends to stagnate in the last three years, particularly when they are compared to credit growth in 2013 and 2014. A significant decline occurred which left all banks with more than half of the growth they experienced in 2013. Although the situation applies to all banks, RDBs performance are slightly better compared to

their counterparts. This could have an impact on the ability of RDBs to drive regional economy.

Figure 7: Comparison of LDR by Commercial Banks 2012-2017 (in percentage)

Figure 8: Commercial Banks and RDBs Credit Growth 2013-2017 (in percentage)

(2) During the 2012-2017 period, loan provisions in the form of working capital and investment was lower compared to that of consumption credit with an average of 19.89%, 11.12%, and 68.99%, respectively. This shows that RDBs are still oriented towards achieving short-term targets by distributing consumption credit, among others in the form of personal loans, multipurpose loans, motor vehicle loans, retired employee loans, and other consumer loans. Figure 9 illustrates the data of lending to third parties other than banks conducted by regional development banks during the period 2012-2017:

This condition warrants concern on RDBs’ ability to support development programs and finance investment Figure 9: Comparison of Credit Distribution to third-party (Non-Bank) by Regional Development Banks for the 2012- 2017 Period (in percentage)

that cannot be carried out by private sector. As per OJK’s requirement under the Regional Champion Program, RDBs are required to have productive loans int the form of

(7)

working capital and investment loans a minimum of 40%

of their loan portfolio.

In addition, RDBs have not shown success in fulfilling the provisions regulated in Article 12 of PBI Number 14/26/PBI/2012 concerning Business Activities and Office Networks Based on Bank Core Capital. In the article, it was stated that all RDBs are obligated to distribute credit or financing to productive businesses with the following conditions: (a) at least 55% (fifty five percent) of the total financing for Common Equity Tier 1 (BUKU I) banks, (b) at least 60% (sixty percent) of the total financing for the Common Equity Tier 2 (BUKU II) banks, and (c) at least 65% (sixty five percent) of the total financing for Common Equity Tier 3 (BUKU III) banks. In connection with the above conditions, this study identifies arguments that led to the low level of productive lending, namely:

(a) Non-Performing Loans (NPL) on retail loans are lower than that of productive loans. This creates a dilemma for RDBs. Whilst RDBs are expected to increase the Figure 10: NPL credit Commercial Banks in 2012-2017 (in percentage)

proportion of productive credit, the numbers show that this line of credit poses higher risk and, thus, higher NPLs.

During the 2012-2017 period, the average NPLs of retail loans disbursed by RDBs were 0.70%, while NPLs for working capital loans were 9.61% and NPLs for investment loans were 6.66%.

(b) RDBs are “commissioned” to generate dividends for controlling shareholders. This is resulted in a change in the banks’ lending orientation. RDBs are more oriented in consumptive lending as an effort to pursue profits, and (c) The acquisition of third-party funds have mostly originated from local government deposits that have not been spent.

Third-party funds originating from local government deposits are short-term in nature, which affects the ability of RDBs to provide working capital and investment loans which are generally long-term in nature. This eventually leads to a mismatch between the acquisition of funds and the necessity to channel credit to productive projects.

Eventually, RDBs prioritize lending to retail sector, as well as placing funds at Bank of Indonesia and securities. This sacrifices RDBs’ capacity to escalate regional economy and social development.

(3) LDR is a proxy that compares the amount of lending to third parties in the form of rupiah and foreign exchange excluding interbank funds by obtaining third- party funds (including demand deposits, savings, and deposits in rupiah and foreign currencies excluding

Figure 11: LDR Credit by Regional Development Banks in 2012-2017 (in percentage)

interbank funds) plus securities in rupiahs and foreign currencies that meet certain requirements issued by banks to obtain funding sources. Based on Bank of Indonesia Regulation Number 17/11/PBI/2015, the LDR is subsequently changed to LFR (loan to funding ratio). On Bank of Indonesia Regulation Number 18/14/PBI/2016, it is stipulated that the LDR (or LFR) of commercial banks should ideally be between 80%-92%. During 2012-2017, the RDBs’ LDR was 89.02%, with the lowest LDR in 2012 amounting to 78.57% and the highest in 2016 which was 93.65%. Figure 11 presents data on RDBs’ LDR during the period.

Figure 12 shows that RDBs have adhered to the minimum requirements required by Bank of Indonesia Regulations Number 18/14/PBI/2016 as well as the requirement set by OJK within the Regional Champion Banks framework. When compared to other commercial bank categories, the average LDR of RDBs is relatively superior with only foreign banks and joint-venture banks are ahead of RDBs. as well as national non-foreign national private banks.

Despite the high LDR, some concerns should be raised:

a) Credit distribution is still not optimum compared to the acquisition of third-party funds. The average growth of credit distribution during 2013-2017 is 9.22%, while the average growth of third-party funds is 10.79%. Therefore, Figure 12: Comparison of LDR by Commercial Banks for in 2012-2017

Figure 13: Comparison of credit growth and growth of third-party funds in the RDBs in 2013-2017 (in percentage)

(8)

there is still room for RDBs to increase the portion of productive lending. Figure 13 shows comparison of credit growth and growth of third-party funds for the 2013-2017.

Where the spread between loan and third-party fund is kept relatively constant during the 2014 – 2016 period, the spread in 2017 implies excessive liquidity due to re- placement of regional funds. These funds were allegedly recalled from RBDs in the previous two years. On the other side of the equation, RDBs have issues in promoting their financing products that their loan portfolio only increases 3.47% in 2017.

b) The NPL of RDBs is higher compared to the rest of the commercial banks. In the 2012-2017 period, the

Figure 14: Comparison of Commercial Bank NPLs in 2012-2017 (in percentage)

average NPL experienced by RDBs is 5.66%, whereas their counterparts enjoy much lower NPLs at around 2.08% to 3.18%. If analyzed further, the largest component of third- party credit NPLs came from working capital loans of 9.61%, followed by investment credit NPLs and consumer credit NPLs of 6.66% and 0.7%, respectively.

(4) During the 2012-2017 period, the average loan granted by RDBs to micro, small and medium enterprises (MSMEs) is lower compared to other commercial banks.

Figure 15 presents comparative data on the average lending to the micro, small and medium enterprises in the period of 2012-2017. The average number of credit extended to the small businesses is 15% and 20% less than that of Foreign Exchange Commercial Banks and State Owned Banks, respectively. Since MSMEs are considered as one of the pillars for regional economic and social development, the numbers depict a gloomy picture of RDBs’ capacity to promote regional development.

Table 2 shows RDBs performance on the credit growth to aforementioned sector in comparison with other commercial banks. The growth is more volatile for RDBs over the six years with the lowest growth of 15.77% in 2015 and the highest of 20.6% in 2012. For other commercial banks, the trend is more stable at 18% to 19% over the same period, though the number might be smoothed by the big banks that are dominating the industry. On average,

Figure 15: Comparison of Third-Party Credit Distribution by Commercial in 2012-2017 (in billion rupiahs)

Table 2: Comparison of Growth of MSME Loans and Third-Party Loans in Commercial Banks and Regional Development Banks in 2012-2017 Period (in percentage)

during the period 2012-2017 RDB’s credit line to MSMEs is growing around 17.65%, while in it reaches 18.57% for commercial banks. On a positive note, RDBs are able to positively trail other banks performance as shown on the time it reaches slow and high growth, namely the year 2015 and 2012, respectively. However, RDBs’ agility to respond to their external business environment is slightly worse than their other counterparts, which can be seen on the wider spread of growth per year.

Despite their lower average credit growth, RDBs have been able to meet the requirements of Bank of Indonesia as stipulated in Bank of Indonesia Regulation (PBI) Number:

14/22/PBI/2012. The regulation stipulates that commercial

banks are required to provide credit or financing to MSMEs proportionally from 2013 to 2018. In 2015, the ratio of MSME financing loans to total credit is expected to be a minimum of 5%, then increased to 10% in 2016, 15% in 2017, and 20% in 2018. The problem is that not all RDBs have been able to meet these requirements. As MSMEs are proxy of regional economy and social development, this performance raises a concern over RSBs’ capacity to be the backbone for MSMEs development in the region. After all, RDBs have advantages not shared by other commercial banks in terms of lending to MSMEs.

These are: (1) emotional closeness, which leads to trust and product innovation to be tailored to MSMEs’ needs and (2) communal sense of belonging to the region that allows RDBs to join efforts to develop regional economy and social for a better living quality. This study identifies that if the two things can be managed properly, they can serve as a leverage for increasing the quantity and quality of credit extended to micro, small and medium business sectors. In the long run, this certainly has a big influence on the functions of regional development banks as agents of regional development and the catalyst for economy and social development.

Another possible explanation for the volatile growth of the credit line for small business is the high NPL of loans channeled to this specific sector. Table 3 shows the

(9)

Table 3: NPL of MSME Loans by Commercial Banks for the 2012-2017 Period (in percentage)

comparison of NPLs for micro, small and medium business loans during the period 2012-2017 amongst commercial banks with apparent issue can be identified to RDBs.

The first column in Table 3 shows the average NPL of the three different business size during the six years of 2012-2017. RDBs average NPLs resulted from micro, small and medium business loans is as high as 8.89%, whilst the other banks are able to maintain an average of low NPL ranging from2.97% for national private banks and 4.12% for foreign and joint-venture banks. This solidifies RDBs’ problems in lending to small and medium micro businesses. Although credit provision is done within Bank of Indonesia requirements, the average NPLs hints an issue related to the practice of prudential banking. This research, therefore, identifies three potential problems faced by RDBs in terms of credit provision to micro, small and medium enterprises. They are: (1) competency of human resources, (2) readiness of supporting infrastructure related to information technology, and (3) governance readiness related to standard operational procedures (POB) as basic provisions in lending to micro small and medium enterprises.

Reformulation of the Role of Regional Development Banks

As explained in the introductory section, the discussion on the reformulation of the RDBs’ role as catalyst for regional socio-economy is emphasized on the mandate dimension specifically related to the tasks or roles carried out by RDBs. By using the concept proposed by Thorne and Du Toit (2009), this research identifies the following matters:

a) In the Indonesian context, RDBs need to be positioned where they can perform their tasks and roles as development banks. At present, this clarity is overshadowed by the fact that RDBs are placed in the same group as state- owned banks, people's credit banks and commercial banks.

Commercial banks, as per Bank of Indonesia Regulation Number 14/26/PBI/2012 article 4, have the following functions: (1) raising funds, (2) channeling funds, (3) trade financing, (4) treasury activities, (5) activities in foreign currencies, (6) agency and cooperation activities, (7) payment system and electronic activities banking, (8) capital participation activities, (9) temporary capital participation activities in order to save credit, (10) other services, and (11) other activities commonly carried out by banks as long as they do not conflict with applicable

laws and regulations. The primary difference between the task of development banks and commercial banks remains in the financing timeframe, type of project financing and advancement in payment system and electronic activities banking. RDBs are targeted to finance medium to long-term multipurpose government projects. One example for this is infrastructure projects which are developed to nurture regional economy and sustain regional growth. As these projects are part of regional government responsibilities, they are financed through the regional budget and known to have medium to long time horizon. RDBs have to finance these type of low risk-low return projects, whilst providing sufficient short-term return in the form of dividends to their shareholders. This indicates that the current positioning of RDBs is not fully suited their purpose. This also raises a question on the Transformation Program set by OJK whereby RDBs are expected to be competitive towards their commercial banks counterparts.

b) On another note, the unclear positioning of RDBs is not limited to their supervisory body with OJK as the main authority for all financial institution in Indonesia.

RDBs have to cater to their primary shareholders need, the regional government, which authority is passed down from the Ministry of Home Affairs. Thus, overlap of rules and regulations related to RBDs is to be foreseen. An example of such overlap is the rules contained in the Republic of Indonesia Minister of Home Affairs Regulation Number 62 of 1999 concerning the main tasks and functions of regional development banks that are not balanced with the ecosystem that regulates the national banking system. At this point, when the regional development bank is included in the category as a commercial bank, it indirectly limits its main tasks and functions as a development bank. In the end, the regional development bank focused on implementing its function as a commercial bank which led to efforts to pursue profitability through profitable projects that entails

“high risk-high return” profile so as to minimize its role as an agent of regional development. This is characterized by a greater orientation in the increase of consumer credit and the low ability to channel productive credit and credit to the micro, small and medium enterprises sector. On the other hand, this condition is also a result of the inability to mitigate credit risk which is resulted in an increase in non-performing loans in the productive credit sector and loans for micro, small and medium enterprises. With regard to advancement in payment system and electronic activities banking, RDBs are lagging their counterparts

(10)

due to the high investment required. In this context, RDBs are not equally compatible with other commercial banks that are very well established from the point of view of information technology and human resource capabilities.

The Chief Executing Officer (CEO) position of RDBs, for example, remains a tug of war between business and political interests. Replacements and/or recalls of CEO in accordance with the change of guard in regional regency has created top management vacancy in various RBDs.

Although this has not plummeted RBDs’ business, it does deter their ability to achieve maximum capacity at performing their core business. Eventually, this forces RDBs to adjust their role and function which tended to be irrelevant to the needs of regional development.

Both conditions mentioned above, in the end, will require clear positioning of the regional development bank.

Related to this, the research recommends two things that could become a stepping stone for a new reformulation of the role of the regional development bank. First, in line with the opinion of Thorne and Du Toit (2009) above, the clarity of the mandate will provide opportunities for RDBs to carry out roles that intersect with development.

The meeting point is certainly related to how the regulator places RDBs as commercial banks that carry out functions related to funding and development project financing which have not been a target of commercial banks. This could be done by revising the Banking Law No.10 year of 1998 to place the regional development bank as a special bank with a function related to finance and funding that supports development as well as other sectors that are still not covered by the commercial bank. This is in line with the statement of Griffith-Jones (2016) that one of the criteria for a good development bank is related to the clear target of the development bank to support the government development programs. Thorne and Du Toit (2009) suggested that clarity on the mandate would reduce some of the potentials that could have disrupted the role of development banks.

Thorne and Du Toit (2009) shows that development banks that do not focus on mandates related to their functions in development funding and financing are ineffective, vulnerable to achieving vision and mission, presenting problems in terms of governance, lack of transparency, and more vulnerable to political disturbances. Even though on the other hand, weaknesses must still be anticipated when only focusing on the main functions and tasks as regional development. Second, strengthening productive lending programs that are in line with strengthening regional potential, developing micro, small and medium enterprises in the regions, as well as funding or special financing that supports regional development. The program for granting credit can ultimately be linked to working programs that are a priority for development set by the provincial government in the province, district, and municipality. RDBs can be partners for regional governments, including provinces, districts and municipalities in carrying out regional development. This synergic relationship will ultimately create mutually beneficial cooperation for RDBs as well as regional governments. On the one hand, RDBs can create a space for funding and financing that is precisely targeted, profitable, and relevant to regional conditions. On the other hand, regional governments, including provinces, districts, and municipalities, can run superior programs that are in

line with regional potential and have a positive effect on improving regional economy. This mutualism relationship also needs to be fostered and developed because, after all, the regional governments, including provinces, districts, and municipalities are the shareholders of RDBs so that they indirectly have a moral obligation to develop these banks. When RDBs are successful in providing funding or financing to projects otherwise cannot be funded by other commercial banks, they will create potential advantages as well as differentiating factor to ultimately strengthen its role and function as RDBs. Thorne and Du Toit (2009) said that in the context of funding and financing, the success of development banks is determined by its ability to create a new role to provide complementary funding to projects that are run by other commercial banks. Typical funding or financing and characterizing regionalism will eventually open up opportunities for the emergence of specific market niche but will have an impact on improving the regional economy.

In the end, it can be said that the reformulation of the role of regional development banks as agents of regional development starts from the clarity of its positioning within the national banking system. The clarity of this position relates to its role and function as a development bank. This ultimately led to the clarity of the mandate in the form of a task or function carried out by RDBs as development banks.

In this context, Thorne and Du Toit (2009) positions RDBS to focus on their initial functions as agents of regional development and catalyst of regional economy and social development which play a role in financing development and encouraging regional economies through positioning them as banks for micro, small and medium enterprises in the region. A change in positioning is realized in the form of structuring RDBs through three steps. First, to encourage the realization of regulations that clarify the position of RDBs as development banks that carry out different tasks and functions compared to commercial banks and rural credit banks. This can be applied by providing an addendum to Law Number 10 of Year 1998 concerning Indonesian Banking. this means the strengthening of functions and main tasks starts from the clarity of the mandate. Secondly, to synergize various product development programs for RDBs with superior programs at the provincial, district or municipal levels. This synergy is expected to create mutually beneficial relationships which then lead to increased competitiveness of regional development banks and regional economies. Regional government programs, including provinces, districts and municipalities are mainly related to the creation of regional competitiveness in synergy with regional development bank programs contained in the bank's business plan. When this continues, it is hoped that it will create a dual effect for improving the regional economy. In addition, in the end, the regional development bank will have programs that specifically characterize the area where the regional development bank originates. This is certainly a differentiator with other regional development banks and other commercial banks.

Thirdly, RDBs should conduct a preliminary study for an initial public offering (IPO) as part of a strategy to increase capital, structure corporate governance, and improve corporate value.

(11)

CONCLUSION

RDBs have not been able to maximize their role as a catalyst for regional economy and social development, thus do not effectively perform their primary function as development banks. This is indicated by the low participation of productive loan provision and the number of loans that support the development of micro, small and medium enterprises. This study argues that the problem arises from the conflicting core business of a development bank. Thus, it is necessary to reformulate the role to be in line with its duties and functions of a development bank.

Reformulation of the role of RDBs as a catalyst for regional economic and social development begins with their clear positioning within the national banking system.

REFERENCES

Bank Indonesia. 2007. Sejarah Bank Indonesia: Perbankan Periode 1959-1966. Unit Khusus Museum Bank Indonesia

Burgess, Robin, and Rohini Pande. 2005. Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment. The American Economic Review, Vol. 95, No. 3, p.780-795.

De Aghion, Beatriz Armendariz. 1999. Development Banking. Journal of Development Economics, Vol.58, p.83-100.

European Network on Debt and Development. 2017.

Public Development Banks:Towards a Better Model. A Eurodad Discussion Paper.

Griffith-Jones, S. 2016. Development Banks and Their Key Roles: Supporting Investment, Structural Transformation and Sustainable Development, Discussion Paper No. 59. Bread for the World; Barone, www.brot-fuer-die-welt.de.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2002.

Does Local Financial Development Matter ?, Working Paper 8923, p. 1-45.

Hasan, Iftekhar, Paul Wachtel, and Mingming Zhou.

2006. Institutional development, financial deepening and economic growth: Evidence from China, BOFIT Discussion Papers, p. 12.

Jayaratne, Jith and Philip E Strahan. 1995. The Finance- Growth Nexus:Evidence From Bank Branch Deregulation, Federal Reserve Bank of New York Research Paper No. 9513, p.1-44.

Kendall, Jake. 2012. Local Financial Development and Growth. Journal of Banking and Finance, Vol. 36, p.

1548-1562.

Ligeti, Sandor. 1985. Development Banks in The Developing Countries. Savings and Development, Vol.

9. No. 3, p.297-323.

Ozturk, Huseyin, Derya Gultekin-Karakas, and Mehtap

Hisarciklilar. 2010. The Role of Development Banking in Promoting Industrialization in Turkey. Region et Developement, p.153-178.

Republik Indonesia. 1962. Law of Republic of Indonesia number 13 year 1962 on Basic Provision for a Regional Development Bank . Supplement of the Republic of Indonesia state gazette number 2490.

Republik Indonesia. 1998. Law of Republic of Indonesia number 10 year 1998 on the amendment of the act of Republic of Indonesia number 7 year 1992 on Banking.

Supplement of the Republic of Indonesia state gazette number 182.

Republik indonesia. 1999. Ministerial Regulation of Indonesian Minister of Home Affairs number 62 year 1999. on guidelines for organization and management of a regional development bank.

Republik Indonesia. 2012. Bank Indonesia Regulation number 14/26/PBI/2012 about business activity and Banks core capital-based office network. Supplement of the Republic of Indonesia state gazette number 5384.

Republik Indonesia. 2012. Bank Indonesia Regulation number 14/22/PBI/2012 regarding the provision of credit or funding by common bank and technical assistance in order to the development of micro, small, and medium business.Supplement of the Republic of Indonesia state gazette number 5378.

Republik Indonesia. 2015. Bank Indonesia Regulation number 17/11/PBI/2015 on revision over Bank Indonesia Regulation number 15/15/PBI/2013 regarding mandatory minimum giro commercial banks in the rupiah and in foreign exchange for convensional commercial banks. Supplement of the Republic of Indonesia state gazette number 5712.

Republik Indonesia. 2016. Bank Indonesia Regulation number 18/14/PBI/2016 on fourth revision over Bank Indonesia Regulation number 15/15/PBI/2013 regarding regarding mandatory minimum giro commercial banks in the rupiah and in foreign exchange for convensional commercial banks .Supplement of the Republic of Indonesia state gazette number 5921.

Thorne, Janine, and Charlotte Du Toit. 2009. A Macro- Framework for Sucessful Development Banks.

Development Southern Africa, Vol. 26, No.5, p.677- Umanto, Chandra Wijaya, dan Andreo Wahyudi Atmoko. 694.

2018. Intellectual Capital Performance of Regional Development Banks in Indonesia. Banks and Bank Systems, Vol. 13 No.3, p.36-47.

Yeyati, Eduardo Levy, Alejandro Micco, dan Ugo Panizza.

2004. Should the Government Be in the Banking Business? The Role of State-Owned and Development Banks. Working Paper, Inter-American Development Bank Research Departement No. 57, p.1-47.