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Editorial Board       p-ISSN 2308-4944 (print)       e-ISSN 2409-0085 (online)
SOI: 1.1/TAS         DOI: 10.15863/TAS

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ISJ Theoretical & Applied Science 12(104) 2021

Philadelphia, USA

* Scientific Article * Impact Factor 6.630


Moral hazard and adverse selection on the people business credit program in Indonesia.

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Language: English

Citation: Taufiqurrahman (2021). Moral hazard and adverse selection on the people business credit program in Indonesia. ISJ Theoretical & Applied Science, 12 (104), 882-891. Soi: Doi:

Pages: 882-891

Published: 30.12.2021

Abstract: This article discusses the behavior of providing bank credit to SMEs during the people business credit (hence shortened as KUR) program in Indonesia.Since its launch in 2007, the average NPL for these loans has increased.It indicates the existence of moral hazard behavior in the distribution of credit by the bank. To prove this, this article implements a threshold regression model. The data includes 38 participating banks, observed from Q1-2008 to Q2-2021.The results of data analysis reveal that moral hazard behavior exists when the NPL is below or equal to 5.87%. On the contrary, it experiences adverse selection.Specifically, moral hazard behavior is dominant in the case of investment credit and banks owned by local governments.In working capital loans and others, this behavior also occurs, but not as much as in the case of investment loans.Moral hazard and adverse selection behavior were not detected anyhow in state-owned banks, while in private banks, these only occurred at a low level.At the end of the analysis, we also consider the shock effects of the global financial crisis (2008), European crisis (2009), and the Covid-19 pandemic (2020-2021) on the threshold regression model. However, the results are negative, thus strengthening our previous findings.In general, the factors that significantly determine the risk of non-performing loans in the people business credit program are; increased loan growth rate, market share, deposit insurance interest rates, and economic growth as well as a decrease in the benchmark interest rate.However, the specifics are different both in each type of credit and the type of participating bank.

Key words: moral hazard behavior, adverse selection, non-performing loan, people business credit, threshold regression model, bank.








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