Bank ownership, governance changes, and small business lending in Indonesia: A two-stage estimation approach

This study examines how bank ownership types and governance changes affect small business lending in Indonesia from 2009–2019. Using a novel two-stage estimation approach proposed by Kripfganz and Schwarz (2019), we analyse differences between domestic and foreign banks, as well as the static, selection, and dynamic effects of ownership changes. The Indonesian context is particularly relevant due to banking sector reforms, including foreign acquisition limits and consolidation policies implemented after the 1997–1998 Asian financial crisis. We contribute to the literature by: (i) focusing on a large, profitable emerging market dominated by government-owned banks; (ii) investigating both static ownership and structural changes; (iii) including foreign acquiring banks in our analysis of foreign ownership; and (iv) applying an innovative econometric methodology that offers advantages over traditional GMM estimators. We find no statistically significant differences in the proportion of small business loans between these bank types, whether measured as a percentage of total loans or total assets. However, when analysing sub-periods (2009–2014 and 2015–2019), the results suggest that foreign banks became less oriented towards SME lending after 2015, coinciding with changes in the Indonesian banking industry. The differences among static, selection and dynamic effects are only substantial regarding their magnitude, but not their significance. Hence, by examining whether the effects of changes in governance on small business lending remain constant or evolve over time following ownership transitions, we provide insights into the sustainability of banking sector reforms and their impact on SME financing. Our findings also have implications for understanding how SME access to finance in emerging markets is impacted by bank governance. In addition, our methodological application could be considered to reassess the impact of different bank property types in other contexts, given the robustness it confers to the results.

Riyanti, R.S., I. Arribas, S. Pazzi and E. Tortosa-Ausina (2026). «Bank ownership, governance changes, and small business lending in Indonesia: A two-stage estimation approach». Emerging Markets Review 72 (June): 101452.  https://doi.org/10.1016/j.ememar.2026.101452