Democratization and the depoliticization of the banking sector: Are all banks affected equally?

Figures & data

Table 1. Bank-level descriptive statistics for the population of Indonesian banks prior to democratization (1996).

	(1)	(2)	(3)	(4)	(5)	(6)	(7)
	Number of all banks 1996	Number of banks 1999	Lending	Return on equity	Return on assets	Net Interest Margin	Solvency
Domestic private	183	82	168,256	10.154	1.51	3.565	0.057
Foreign	14	14	12,263	31.323	4.191	4.852	0.052
Joint venture	38	25	15,307	20.492	2.436	3.751	0.031
Regional banks	30	25	7748	27.533	2.403	4.562	0.032
State banks	13	5	158,258	15.451	0.912	5.156	0.061
Total	278	151	361,832	20.892	2.105	4.827	0.052

Notes: Column 2 reports total lending by each group in billions rupiah. Columns 3–6 report the averages within each group.

Table 2. The number of political connections of Indonesian bank boards over democratization 1993–2008.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)
	All Years	Total pre-democratization	Pre-democratization only	Post-democratization only	Both periods	Exit rate	Decrease in connections over period
Domestic private	152	134	72	18	62	0.53	0.41
Joint venture	14	13	4	1	9	0.30	0.23
Regional bank	19	17	10	2	7	0.59	0.47
State bank	17	15	12	2	3	0.80	0.67
Total	202	179	98	23	81	0.55	0.42

Notes: Column 1 indicates the total number of unique bank-elite connections over all of the years in the sample. Column 2 shows the total number of ties that existed pre-democratization (1993–1999). Column 3 shows the number of unique bank-elite connections that only existed in the pre-democratization years. Column 4 shows the number of unique bank-elite connections that existed in only the post-democratization years (2000–2008). Column 5 shows the number of unique bank-elite pre-democratization connections that existed prior to democratization and remained over the transition. Column 6 shows the exit rate of political ties (column 3 divided by column 2). Column 7 shows % decrease in connections as calculated by summing columns (3) and (4) and dividing by the number of pre-democratization connections (column 2 plus column 4), thus taking into account new ties emerging post-democratization. Foreign banks are excluded as they do not exhibit political connections. This table includes both surviving and closed banks.

Table 3. Number of political connections by bank ownership type for closed banks.

	(1)	(2)	(3)	(4)	(5)
	Total number pre-democratization ties (closed and surviving)	Pre-democratization only (closed and surviving)	Political connections to closed banks	% Total pre-democratization ties from closed banks	% Ties of pre-democratization only
Domestic private	134	72	20	0.15	0.27
Joint venture	13	4	0	0	0
Regional bank	17	10	3	0.18	0.30
State bank	15	12	4	0.27	0.33
Total	179	98	27	0.15	0.28

Notes: Column 1 indicates the total number of unique bank-elite connections that existed in the pre-democratization period. Column 2 shows the total number of ties that existed pre-democratization only (i.e. no longer existed after democratization). Column 3 provides the number of unique elite connections to closed banks. Column 4 and 5 consider column 3 as a proportion of column 1 and column 2, respectively. Foreign banks are excluded as they do not exhibit political connections.

Table 4. Proportion of Indonesian bank boards over democratization 1993–2008.

	(1)	(2)	(3)
	All years	Average proportion of political elites pre-democratization	Average proportion of political elites post-democratization
Domestic private	0.25	0.33	0.21*
Joint venture	0.12	0.15	0.11*
Regional bank	0.28	0.39	0.26*
State bank	0.35	0.41	0.33*
Total	0.33	0.38	0.25*

Notes: The proportions of Table 4 are calculated in the following way. The proportion of political elites on each bank board for each year is calculated. Then, the average proportion for each year, the average proportion for each type of bank based on ownership type per year is calculated. Then we calculate the proportions over each time period.

* t-test of the differences in the means presented in columns 2 and 3 is significant. This includes closed banks.

Table 5. Differences in the proportion of political connectedness by bank ownership type between remaining and closed banks.

	(1)	(2)
	Pre-democratization surviving banks	Pre-democratization closed banks
Domestic private	0.33	0.41*
Joint venture	0.15	0.14
Regional bank	0.39	0.38
State bank	0.41	0.38
Average across all banks	0.38	0.26

Notes: The proportions of Table 5 are calculated in the following way. The proportion of political elites on each bank board for each year is calculated. Then, the average proportion for each year, the average proportion for each type of bank based on ownership type per year is calculated. Then we calculate the proportions over each time period.

* t-test of the differences in the means presented in columns 1 and 2 is significant.

Table 6. The relationship between bank political connections and outcomes for government-owned banks 1993–2008.

	(1)	(2)	(3)	(4)	(5)
Dependent variable	Lending	Return on equity	Return on assets	Net interest margin	Solvency
Proportion of political elites on bank board * Post	0.196***	0.018*	0.001*	0.017**	0.020**
	(0.022)	(0.020)	(0.000)	(0.006)	(0.003)
Proportion of political elites on bank board	0.188***	−0.014***	−0.012*	−0.013**	−0.018*
	(0.004)	(0.045)	(0.005)	(0.002)	(0.005)
Post	0.120*	0.201*	0.100*	0.0839**	0.102*
	(0.010)	(0.001)	(0.005)	(0.021)	(0.009)
Constant	8.615**	2.555*	0.669*	0.695***	5.621*
	(2.005)	(0.909)	(0.209)	(0.012)	(2.012)
Bank level controls	X	X	X	X	X
Fixed effects	X	X	X	X	X
Year Dummies	X	X	X	X	X
Observations	401	388	388	388	388
R-squared	0.118	0.119	0.109	0.192	0.221

Notes: Robust standard errors in parentheses.

Proportion of political elites on bank board is the total number of political elites divided by total bank board members across all existing boards (board of directors, board of commissioners, audit board, and supervisory board). Post is an indicator equal to one for the post-democratization years (after 1999).

All dependent variables in log form. Lending is measured in billions IDR, return on equity is the ratio of net income to total capital, return on assets is the ratio of net income to total assets, net interest margin is the ratio of net interest income to total assets and bank solvency (as measured by the z-score). Z-score = ((ROA_it+CA)_it/σ(ROA))_i, where CA is the capital adequacy ratio, ROA is averaged for each bank over the pre-and post-democratization periods.

Bank level controls include measures of total board size, the competitiveness of the bank’s industry (a geography-based measure of industry competitiveness using the share of deposits of banks in the industry), size (log (total assets)), operating leverage (fixed assets/total assets), and liquidity (liquid assets/liquid liabilities), and bank age (years from establishment).

*** p < 0.01;

** p < 0.05;

* p < 0.1.

Table 7. The relationship between bank political connections and outcomes for privately held Indonesian banks 1993–2008.

	(1)	(2)	(3)	(4)	(5)
Dependent variable	Lending	Return on equity	Return on assets	Net interest margin	Solvency
Proportion of political elites on bank board * Post	0.045**	0.011*	0.012*	0.014**	0.030**
	(0.002)	(0.003)	(0.006)	(0.001)	(0.018)
Proportion of political elites on bank board	0.078**	0.008**	0.007*	0.009**	0.003*
	(0.003)	(0.001)	(0.002)	(0.002)	(0.001)
Post	−0.112***	−0.148*	−0.111*	−0.121**	−0.052*
	(0.085)	(0.056)	(0.004)	(0.018)	(0.019)
Constant	12.182**	2.889*	0.893*	2.875*	3.958*
	(4.365)	(1.016)	(0.127)	(1.014)	(1.001)
Bank level controls	X	X	.X	X	X
Fixed effects	X	X	X	X	X
Year Dummies	X	X	X	X	X
Observations	1566	1514	1514	1514	1514
R^2	0.196	0.158	0.149	0.241	0.232

Notes: Robust standard errors in parentheses.

Proportion of political elites on bank board is the total number of political elites divided by total bank board members across all existing boards (board of directors, board of commissioners, audit board, and supervisory board). Post is an indicator equal to one for the post-democratization years (after 1999).

All dependent variables in log form. Lending is measured in billions IDR, return on equity is the ratio of net income to total capital, return on assets is the ratio of net income to total assets, net interest margin is the ratio of net interest income to total assets and bank solvency (as measured by the z-score). Z-score = ((ROA_it+CA)_it/σ(ROA))_i, where CA is the capital adequacy ratio, ROA is averaged for each bank over the pre-and post-democratization periods.

Bank level controls include measures of total board size, the competitiveness of the bank’s industry (a geography-based measure of industry competitiveness using the share of deposits of banks in the industry), size (log (total assets)), operating leverage (fixed assets/total assets), liquidity (liquid assets/liquid liabilities), and age (years from establishment).

*** p < 0.01;

** p < 0.05;

* p < 0.1.

Table 8. Differences in the proportion of elites on government-owned versus privately held banks with college or postgraduate education.

	(1)	(2)
	Government-owned banks	Privately held banks
College educated only	0.39	0.41
Postgraduate educated	0.28	0.32

Notes: This table reports the mean proportion of college educated and postgraduate educated political elites on government-owned (column 1) and privately held (column 2) bank boards.

* t-test of the differences in the means presented in columns 2 and 3 is significant.

Table 9. The relationship between bank political connections and outcomes for privately held Indonesian banks 1993–2008 without joint venture.

	(1)	(2)	(3)	(4)
Dependent variable	Lending	Return on equity	Return on assets	Net interest margin
Proportion of political elites on bank board * Post	0.031**	0.011*	0.013*	0.013**
	(0.001)	(0.003)	(0.005)	(0.004)
Proportion of political elites on bank board	0.075**	0.007*	0.005*	0.009**
	(0.001)	(0.003)	(0.001)	(0.002)
Post	−0.114***	−0.148*	−0.108*	−0.181*
	(0.019)	(0.061)	(0.002)	(0.018)
Constant	12.501**	2.998*	0.983*	3.113*
	(3.215)	(1.007)	(0.224)	(1.002)
Bank level controls	X	X	.X	X
Fixed effects	X	X	X	X
Year Dummies	X	X	X	X
Observations	1124	1101	1101	1101
R^2	0.183	0.153	0.130	0.198

Notes: Robust standard errors in parentheses.

Proportion of political elites on bank board is the total number of political elites divided by total bank board members across all existing boards (board of directors, board of commissioners, audit board, and supervisory board). Post is an indicator equal to one for the post-democratization years (after 1999).

All dependent variables in log form. Lending is measured in billions IDR, return on equity is the ratio of net income to total capital, return on assets is the ratio of net income to total assets, net interest margin is the ratio of net interest income to total assets and bank solvency (as measured by the z-score). Z-score = ((ROA_it+CA)_it/σ(ROA))_i, where CA is the capital adequacy ratio, ROA is averaged for each bank over the pre-and post-democratization periods.

Bank level controls include measures of total board size, the competitiveness of the bank’s industry (a geography-based measure of industry competitiveness using the share of deposits of banks in the industry), size (log (total assets)), operating leverage (fixed assets/total assets), and liquidity (liquid assets/liquid liabilities).

*** p < 0.01;

** p < 0.05;

* p < 0.1.