Does Banking Performance Matter for Indonesian Economic Growth?

This study examines the contribution of commercial banking performance to Indonesia’s economic growth in the period from January 2010 to December 2019. In particular, it empirically examines the short- and long-term effects of total credit, loan-to-deposit ratios, non-performing loans, capital returns, third-party funds and inflation in the industrial production index. By using the Vector Error Correction Model (VECM), this study found that commercial banks make an insignificant contribution to the Indonesian economy in the short term. In the long run, however, total credit, loan-to-deposit ratio and third-party funds contribute positively to the national economy. These findings reconfirmed the positive role of the banking sector in promoting the long-run economic growth of Indonesia. These results provide some important implications for the banking industry to offer more innovative products and services based on digital banking and fintech. In addition, the Indonesian Monetary Authority should support banking activities and develop an efficient credit allocation mechanism using advanced fintech in responding to the 4.0 era to further promote the real sector of the Indonesian economy.