Sources of Economic Financing in Indonesia: A Survey Approach - Bank Sentral Republik Indonesia
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October 25, 2020

Abstract

The economic crisis in 1997-1998 wrought significant losses in the banking sector and the subsequent recapitalisation program encouraged banks to focus more on internal consolidation in order to achieve capital targets (CAR) and ease non-performing loans (NPL). Such conditions precipitated a notable decline in credit supply, thus, triggering a credit crunch that ultimately compelled the real sector to seek alternative sources of financing. Consequently, the structure of corporate financing underwent a shift from the dominance of credit to internal funds.

Previous research has successfully evidenced the shift in corporate financing structure. However, in order to delve deeper into information regarding the different types of internal funding sources available a survey approach is utilised in this research. The results indicate that internal funds continue to dominate capital and investment financing with a total share of 48.3% in 2009. The vast majority of internal funds (98.4%) stems from retained earnings, and with a positive trend corporate profitability has nearly reached 70%. This indicates that the use of internal funds is relatively sustainable. Additionally, some interesting findings also emerged concerning the important role played by trade credit/accounts payable in corporate financing, in particular to finance working capital, exceeding the portion of financing from domestic bank loans.

Furthermore, results of analytical testing on the elasticity of economic growth to bank credit, derived from the Cobb-Douglas function, indicated a significant decline from around 0.1, on average prior to the crisis, to about 0.04 after the crisis. This testifies to the diminishing role bank credit has played in economic financing in Indonesia during the postcrisis period, which has spurred adverse consequences for monetary policy.

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