The Office Channeling Policy, the Development of Islamic Banking, and SMEs Financing in Indonesia.

Abstract

The Islamic banking has grown rapidly and showed relatively better performance than the conventional banking. The development is supported by the improvement of banking law No. 7 in 1992 into No. 10 in 1998 which allows two banking systems in Indonesia, and the issuance of Bank Indonesia Regulation Number 9/7/PBI/2007 about a policy to expand the Islamic services for conventional banks (office channeling). However, the rapid growth of Islamic banking is not adequate compared to the community needs of Islamic banking services (Rohaya 2008). This is a highly prospective opportunitysince the majority of Indonesian population is Muslim. Based on Indonesian Islamic banking statistics, it indicates that the share of assets, depositor funds (DPK) and financing in small and medium enterprises (PYD) of Islamic banking to commercial banks has increased, although the value is still relatively small. In 2012, the share of assets was ammounted to 4.85%, 4.84% for DPK and 6.71% for PYD. But it may be improved since the financial market opportunities in Indonesia are still great especially in real activity. Islamic banking may be a hope for the development of small and medium enterprises (SMEs) with the concept of profit and loss sharing. SMEs have an important and strategic role, the ability of SMEs need to be empowered and developed to reduce the constraints they experienced so they can be able to contribute more leverage (Sutaryo 2004). SMEs face greater growth obstacles and have less access to formal sources of finance (Beck & Demirguc-Kunt 2006). One of the effective measures to overcome the SMEs problems is by financing using its own community financial resources, and implementing the development approach which has the potential to sustainability. The government continues its efforts to increase the role of banking through legislation and policies, as well as to strengthen the role of SMEs in improving the financing access from bank. The existence of Islamic banking is getting stronger and may be hope for SMEs business development as well as becoming an alternative financing source for SMEs. The development of Islamic banking has experienced rapid growth. However, this research was done to find out whether the increasing development of Islamic banking give a positive response in the SMEs financing and other variables in line with the rising of Islamic banking portfolio; and to find out what variables that affect the growth of Islamic banking all along. The purpose of this study: 1). To describe the effect of the Islamic banking development variables, 2). To analyze the dynamic response to the shocks of Islamic banking development variables, 3). To describe the development of Islamic banking in the presence of the office channeling in financing the SMEs. The auto-regression vector (VAR) method was used in this study, and was solved using Eviews version 8 software. VAR analysis required the data to be used must have been stationary at the time of unprocessed (level). When the data used were not stationary at the level, the VAR analysis could still be used after the data was transformed to become stationary. Testing in VAR analysis included the data stationary test, the determination of the optimal lag, co-integration test, Granger causality test, impulse response function (IRF) analysis, and forecast error variance decomposition (FEVD). A statistic-t test was done to explain the development of Islamic banking before and after office channeling in financing the SMEs. Stationary test results showed that the variables used in this study were not entirely stationary at level, except for the asset growth variable (GAST) and operating expenses to operating revenue (BOPO). Therefore, the processing was continued to the first difference so the variables were all stationary. To determine the optimal lag level, the smallest Schwarz Information Criteria (SC) was used. Based on the SC calculation, the minimum value was at lag 1 and it was the optimal lag. Based on cointegration testing, there were 6 co-integrated equations. It showed that the variables affected each other and have a stability relationship and movement similarity in long term. The estimation of vector error correction model (VECM) was obtained in the long-term and the short-term equation for each variable. In the long-term equation of BOPO, DPK, GAST, non-performing financing (NPF), the number of workers (PKJ) and PYD as endogenous variables, they were significantly affected by PYD variable. But in the short-term, not all exogenous variables have a significant effect. Based on the results of Granger causality test, there wasa relationship among bilateral causality variables, occurs in PKJ:DPK, PYD:DPK, PKJ:NPF, PYD:NPF and PKJ:PYD; while the unidirectional causality occurs in: DPK:BOPO, PKJ:BOPO, PYD:BOPO, DPK:NPF and PKJ:GAST. IRF analysis was used to discover or determine the effect of a shock deviation standard on changes in the endogenous variables value in the present and future. IRF values showed the effect between the variables studied, and the result of variance decomposition provided information about the relative importance of each random innovation in affecting the variables in the VAR. The amount of the Islamic finance given to SMEs was more dominantly influenced by the development of DPK and BOPO. The conclusions of this study are as follows: 1). The variable of Islamic banking development had amutual influence, stability relationship, and movement similarity in the long term; while in the short term, not all variables significantly affecting its endogen variable equation. Unidirectional, bilateral and independence causality relationship may occurs among variables, 2). Shocks variable of 1 standard deviated to the variable itself, gave impacton BOPO, DPK, GAST and NPF. Therefore, the fluctuations in BOPO, DPK, GAST and NPF were dominantly responsed by the shock variable itself, 3). The existence of office channeling gave a significant difference and influence on Islamic financing given to SMEs. The growing Islamic banking impacted on the increase of SMEs financing.