Does focus strategy work? A study of bank loan portfolios in Indonesia
| Published date | 08 July 2019 |
| Date | 08 July 2019 |
| Pages | 450-471 |
| DOI | https://doi.org/10.1108/JABS-11-2017-0202 |
| Author | Apriani Dorkas Rambu Atahau,Tom Cronje |
| Subject Matter | Strategy,International business |
Does focus strategy work? A study of bank
loan portfolios in Indonesia
Apriani Dorkas Rambu Atahau and Tom Cronje
Abstract
Purpose –The purpose of this paperis to determine the impact of loan concentration on thereturns of
Indonesian banks and examines whether bank ownership types affect the relationship between
concentrationand returns.
Design/methodology/approach –This research uses heuristic measures of concentration: The
Hirschman–Herfindahlindex and Deviation from Aggregated Averagesare applied to Indonesian banks
across all sectors. The data coversthe pre and post global financial crises periods from 2003-2011for
109 commercialbanks in Indonesia. Panel feasiblegeneralised least squares analysiswas applied.
Findings –The findings show that loan concentration increases bank returns. The positive effect of
concentration on returns tends to be more significant for domestic-owned banks. In addition, the
interaction effect shows that the positive effect of concentration on returns is less for foreign-owned
banks.
Research limitations/implications –The Indonesian central bank changes to the reporting format of
sectoral loan allocation by banks since 2012 in terms of the Indonesian Banking Statistics Details of
Enhancement matrixrequires separate data analysis for 2012 onwards. The findingsof this paper could
be enhanced by more detailed data like interest rate expensesand bank level sectoral non-performing
loans data.
Practical implications –The findings suggest that a focus strategy providesbetter returns. Moreover,
bank ownershiptypes is an important factor to considerwhen setting a bank lending policy.
Originality/value –This paper is amongthe few studies where different measures of loanconcentration
in combination with measures of return are applied in Indonesia as an emerging Asian country. The
research also provides evidence of the impact of concentration on the interest earnings of the loan
portfolios of banks in addition to return on assets and return on equity that are generally applied as
measuresof return in previous research.
Keywords Concentration, Deviation from aggregated average, Heuristic measures, HHI
Paper type Research paper
1. Introduction
Loan portfolios, similar to stock or bond portfolios, consist of combinatio ns of loans that have
been issued or purchased and are being held for repayment (Scott, 2003). Such loan
portfolios of banks may be concentrated or diversified across products and sectors/ segments
with consideration of the magnitude of intrinsic risks constituting the portfolios. These risks
include interest rates, loss probabilities (Scott, 2003), cash flows, maturities, (Sathye et al.,
2003), central bank regulations (Rossi et al.,2009) and expertise dimensions (Cronje, 2013).
Unacceptable levels of loan concentration caused many past bank failures (Dullmann and
Masschelein, 2006) and had the most significant impact on the solvency of banks
(Deutsche Bundesbank, 2006). Cronje (2013) on the other hand, states that banks, which
only lend to certain industrial or geographic sectors, are likely to gain enriched expertise
about those sectors, and hence,may be able to manage the risks better than banks that are
more diversified.
Apriani Dorkas Rambu
Atahau is based at
Department of
Management, Universitas
Kristen Satya Wacana,
Salatiga, Indonesia.
Tom Cronje is based at
School of Economics,
Finance and Property,
Faculty of Business and
Law, Curtin University,
Bentley, Australia.
Received 9 November 2017
Revised 22 May 2018
Accepted 10 September 2018
PAGE 450 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 13 NO. 3 2019, pp. 450-471, ©Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-11-2017-0202
Research about the relationship between concentration and bank performance has
previously been conducted in Germany (Hayden et al., 2006), Brazil (Tabak et al.,2011),
Austria (Rossi et al., 2009), Mexico (A
´vila et al., 2006) and Zambia (Simpasaand Pla, 2016).
The findings show that the impact of loan concentration on bank performance differs in the
countries where the research was conducted. Due to the inconclusive result, it is believed
that research about the relationship between loan concentration and bank performance in
Indonesia may contribute to the sphere of research. Indonesia is one of the fastest growing
emerging markets. Its highly centralized political and economic environment has also
changed into a more democratic economy with similarities to other emerging economies in
Asia, Eastern Europe, Africa and South America (Yuliansyah et al., 2016). Notwithstanding
the existence of similarities, Indonesia is the largest national economy in South East Asia
with a market-based economy (Baker and Powell, 2012). It shows the highest credit growth
of all Association of Southeast AsianNations (ASEAN) countries, but ironically the amount of
credit provided is still the lowest and Indonesian banks are still operating at higher net
interest margins than that in the other ASEAN countries (Muljawan et al., 2014). These
aspects single Indonesia out from otherAsian countries.
Moreover, Indonesia underwent massive banking reform following the devastating 1997/
1998 Asian Financial Crisis (AFC) with credit risk representing a major loan portfolio risk for
Indonesian banks (Goeltom, 2005). Since the AFC, the Indonesian government has
introduced banking reforms to rectify the situation and to prevent similar situations in the
future. The massive restructuring not only reduced the number of banks but also caused
changes in bank ownership types. The ownership changes still positioned the government
banks as the dominant players in the banking industry with more than 50 per cent of the
market share. This study, therefore, differentiates between bank types like Government
Banks, Foreign Banks and Domestic Banks and provides empirical evidence about loan
concentration after the AFC in a country with a market-based economy where the
government still plays an importantrole.
The objective of this study is to determine the impact of loan portfolio concentration on the
returns of Indonesian banks using heuristic measures. The research distinguishes, with due
consideration of the effect of bank sizes, between the different types of bank ownership
[Domestic banks (DBs), Government-owned banks (GBs) and Foreign-ownedbanks (FBs)].
Indonesia is a developing Asian country where bank sizes differ. This may implicate the
diversification ability of banks. According to Acharya et al. (2002), there is a positive
relationship between diversification and size. This aspect has also been considered in the
study of De-Haas et al. (2010) where size is stated as a determinant of bank loan portfolios.
Berger et al. (2010b) also considered bank size as an important determinant of
diversification. Within the Indonesian context, the possibility exists that larger size banks
with more geographical representation may be more diversified. However, this may not
apply to all bank types. For example, government banks may be forced to lend to certain
sectors or industries to fulfill state objectives (Sapienza, 2004). In such cases, size may not
necessarily implicate their diversification. Furthermore, foreign banks operating in different
countries, may irrespective of their own sizes as subsidiaries, possess diversification
abilities based on the capital backing from their parent companies. This is based on the
findings of Demsetz and Strahan (1997) that a positive relationship exists between the size
of bank holding companies and diversification of subsidiaries. However, similar to
government banks, the market focus of the holdingcompanies may also serve as directives
to the subsidiaries and not necessarily represent diversification in the countries where
subsidiaries are located.
The heuristic measures Hirschman–Herfindahl index (HHI) (A
´vila et al.,2006;Pfingsten and
Kai, 2002;Dullmann and Masschelein, 2006; Tabak et al., 2011b) and Deviation from
Aggregated Averages [suggested by Lange et al. (2010) and Saunders and Cornett
(Cronje, 2013)] are applied in a multivariate model for loan portfolio concentration in
VOL. 13 NO. 3 2019 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 451
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