Analysis of banking credit distribution using the vector error correction model

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Abstract

The business model and consequently, the bank’s risk exposure significantly depends on the source of capital (Riabichenko et al., 2019). This research uses vector error correction model (VECM) data analysis to investigate the influence of capital adequacy ratio (CAR), non-performing loans (NPL), loan to deposit ratio (LDR) on the level of credit distribution at commercial banks in Indonesia. Using secondary data, research data was processed using the EViews 12 application with the research population being banking companies listed on the Indonesia Stock Exchange in 2019–2021. The research results show the variables CAR, NPL, and LDR have a significant effect on long-term credit distribution. In addition, the NPL variable significantly influences the credit distribution variable in the short term. The Granger causality test result shows that there is no two-directional causality relationship between the independent variables CAR, NPL, and LDR on the credit distribution variable. The results of this research are in accordance with financial intermediation theory, where the theory explains that savings and loans with high leverage can reduce the possibility of default (payment failure).

Keywords: Capital Adequacy Ratio (CAR), Third-Party Funds (TPF), Non-Performing Loans (NPL), Vector Error Correction Model (VECM)

Authors’ individual contribution: Conceptualization — S.S.; Methodology — J.S.; Formal Analysis — S.L.P.; Writing — Original Draft — S.L.P. and J.S.; Writing — Review & Editing — J.S. and J.J.; Supervision — S.S. and J.S.; Project Administration — S.S. and J.S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G20, G21, G24

Received: 10.03.2023
Accepted: 11.04.2024
Published online: 15.04.2024

How to cite this paper: Suyanto, S., Prasilowati, S. L., Safitri, J., & Jayadi, J. (2024). Analysis of banking credit distribution using the vector error correction model. Corporate & Business Strategy Review, 5(2), 29–37. https://doi.org/10.22495/cbsrv5i2art3