Vol. 15 No.1, Februari 2022


ISSN : 2301-8968


EKONOMI

KUANTITATIF

TERAPAN

JEKT

The Effect of Banks and Cooperatives in Improving Welfare Inayati Nuraini Dwiputri, Lustina Fajar Prastiwi, Grisvia Agustin

ISSN 2301-8968

Denpasar

Februari 2022

Halaman

1-161

The Role of Social Capital with Local Wisdom in Household Food Security in Bali Province Putu Ayu Pramitha Purwanti, Ida Ayu Nyoman Saskara

Middle Income Trap In A Macroeconomic Perspective A Case Study In Indoensia Apip Supriadi

Trade-Environment Triangle in Indonesia: Ecological Footprint Approach Kuratul Aini, Djoni Hartono

Social And Financial Efficiency Of Lembaga Perkreditan Desa Kajeng Baskara

The The Relationship Between Fiscal Policy And Civil Liberty On Per Capita GDP In Indonesia During 1980-2018

Vita Kartika Sari, Malik Cahyadin

The Effect Of Fiscal Decentralization On Economic Growth: A Study Of The Province Level In Indonesia Setyo Tri Wahyudi, Lutfi Kurniawati

The United States’ Monetary Policy Spillover Effect Against Rupiah -Us Dollar Exchange During Usa – China Trade War

Andryan Setyadharma, Anisa Rahmawati, Anisa Rahmawati

Affecting FactorsTrans Land Function In Bali

I Wayan Sudemen, I Ketut Darma

The General Allocation Fund (DAU) Formulation Policy: Incentives or Disincentives to the Fiscal Independence of Local Governments Kun Haribowo, Latri Wihastuti

Impact Of Rural Development Program On Agriculture Production and Rural-Urban Migration In Indonesia Murjana Yasa, Wayan Sukadana, Luh Gede Meydianawathi

Volume 15    Nomor 1


JEKT ♦ 15 [1] : 59-71

eISSN : 2303 - 0186


The Effect of Banks and Cooperatives in Improving Welfare

ABSTRACT

The use of cooperative credit in Indonesia is considered one of Indonesia's supporting economies. Generally, banks in Indonesia have a lower interest rate than cooperative loans. This study wants to identify the impact of cooperative credit on public welfare compared to bank loans. This study uses Indonesian Family Life Survey (IFLS) data with a regression analysis of fixed-effect methods at the village level. The results showed that the role of cooperative and bank credit did not have a significant difference in improving people's welfare. Cooperatives have an essential role in improving people's welfare as well as the bank. The higher the amount of credit taken; the more positive effect is on improving people's welfare. The use of credit for productive purposes also has a more positive influence on improving people's welfare than consumer credit.

Keywords: cooperative, credit, interest rate, welfare

JEL Classification: F63, F61, G18, G21

ABSTRAK

Penggunaan kredit koperasi dianggap sebagai salah satu penunjang perekonomian Indonesia. Umumnya bank-bank di Indonesia memiliki tingkat bunga yang lebih rendah dibandingkan kredit koperasi. Penelitian ini ingin mengidentifikasi dampak kredit koperasi terhadap kesejahteraan masyarakat dibandingkan dengan pinjaman bank. Penelitian ini menggunakan data Indonesian Family Life Survey (IFLS) dengan analisis regresi metode fixed-effect di tingkat desa dan rumah tangga. Hasil penelitian menunjukkan bahwa peran koperasi dan kredit perbankan tidak memiliki perbedaan yang signifikan dalam meningkatkan kesejahteraan masyarakat. Koperasi memiliki peran yang sama pentingnya dengan bank dalam meningkatkan kesejahteraan masyarakat. Semakin tinggi jumlah kredit yang diambil dapat meningkatkan kesejahteraan masyarakat. Penggunaan kredit untuk tujuan produktif dapat memiliki pengaruh yang lebih positif terhadap peningkatan kesejahteraan masyarakat dibandingkan kredit konsumtif.

  • 1.    Introduction                         credit  interest rate as a  profit and

Banks have a crucial role as an justification for the risk borne by the bank.

intermediary institution that functions as a On the other hand, there are microfinance channel for funds from surplus to deficit institutions that are legal entities units. The existence of a bank is very crucial cooperatives have sufficient flexibility and for the business world and economy. Banks are appropriate with the conditions of Micro, distribute funds in the form of investment Small Medium Enterprises (SMEs) which and working capital loans through a variety have a base kinship.

of products. Moreover, banks provide        Cooperative has helped people who

lending to distribute excess funds to deficit can not afford and do not understand filing units to increase their production activities. formal credit to the banks. Wassie, Kusakari, In providing loans, the bank charges the and Masahiro (2019), Grashuis and Su

(2018) indicate that cooperatives effectively improved agricultural performance and welfare of their member households. Debela, Diriba, and Bekeley (2017), Su and Cook (2020) revealed that cooperatives have a positive impact on smallholders’ income and productivity. In addition, cooperatives can also reduce the inequality gap (Khafagy, 2018). In Indonesia cooperative has a great potential in the informal sector particularly1.

The Indonesian economy's great potential requires a financial institution as a bridge that serves as a collector of funds and channels them back to communities for households financing and improvement of social welfare. In general, Indonesia has several levels of society with different financial strengths that can lead to the emergence of financial inclusion issues in the community. In providing credit to the public, Indonesian banking have 5C principles, i.e., Capital, Conditions of the economy, Collateral, Capacity, and Character. Therefore, financially vulnerable people will be challenging to meet the five principles (Pradiptyo, Sugiyanto, Sumiyana, and Dwiputri, 2013).

Bell, Srinivasan, and Udry (1997) said that the inability of poor and vulnerable

households to obtain credit can cause credit demand to be inelastic to the interest rate. The existence of credit constraints can trigger the use of credit of cooperatives. Cooperative is one of the financial institutions used long ago by the people of Indonesia. Cooperatives implement a higher interest rate than bank institutions. It is because the risk level of credit repayment of cooperatives is greater than that of banks.

Bank institutions prioritize the 4C principles, economic conditions, capacity, capital, and collateral in lending, while cooperatives emphasize the principles of prospective borrowers' character compared to other principles. The high risk borne by the cooperative is compensated with a higher interest rate compared to loans by banks. The difference in interest rates between cooperatives and banks, this study aims to identify the role of credit cooperatives in improving society's welfare compared to the credit by banks. This study takes the period after the economic recession in Indonesia (1998-1999), to find out the impact of cooperatives in restoring the people’s economy after a recession in particular. This study can be a reference to determine the effect of cooperatives on society in efforts to recover from the economic crisis.

  • 2.    Literature Review

Carter and Barrett (2006) reveal that poverty and vulnerability correlated with asset ownership. Therefore, the vulnerable household has constraint in obtaining bank credit because banks pay more attention to the 4C principles, while in providing credit, cooperatives often prioritize the "character" principle of prospective borrowers compare to the other principles. Therefore, households that have low financial strength will tend to favor the use of credit of cooperatives in consumption smoothing. In the implementation, formal (bank) credit and non-formal (cooperative) credit can be complementary or substitute (Madestam, 2014). Therefore, formal and cooperative credit can have the same role in the improvement of public welfare.

In the case of companies, both small and large companies, Lahiri and Tian (2013) found that small firms in India have a higher level of dependence on trade credit than larger companies because the collateral factor is the main cause of credit constraint on the company. It is not much different from Indonesia's conditions, where the Indonesian SMEs also have the problem of collateral to get formal credit. Thus, SMEs will use credit cooperatives as an alternative.

Gaisina (2011), Sanchis-Palacio and Melian-Navarro (2011) found that in the agricultural sector, collateral in the form of

agricultural land is often unable to accommodate the obtaining of credit by farmers. Agricultural land that is located in less strategic areas can lead to formal financial institutions are reluctant to provide credit to farmers. In addition, farmers are also considered vulnerable in credit payments because the agricultural sector's income depends on the season and natural conditions, so it is quite vulnerable to crop failures—such conditions experienced by Indonesian farmers.

Unease obtaining credit for low and vulnerable households may lead to demand for loans from low and vulnerable households inelastic to interest rates (Bell, Srinivasan, and Udry; 1997). Therefore, the farming communities need to be supported in gaining access to government credit because access to credit have been able to help farmers to improve their welfare (Ogundeji, Donkor, Motsoari, and Onakuse; 2018)2.

Besides collateral, the area's condition in a rural or urban, the procedure of credit, loan period, and loan interest rates also can affect the credit constraint (Chandio and Jiang, 2018). The study found that education level, and age of farmers in Pakistan can be a decisive determinant of credit constraint. However, providing credit for households is important, because so far it

is known that the use of credit both for consumption and for production can affect on improving social welfare.

The phenomenon of the use of nonformal credit has fueled research related to the impact of the use of non-formal credit on the level of social welfare. Kaboski and Townsend (2012), Khandker (2005), Langley (2014) found that the use of nonformal credit by the poor and vulnerable households could influence the level of social welfare in reducing poverty and helping the local economy. More research is Kaboski and Townsend (2012), Angeles (2015) found that the provision of credit can boost consumption, improve investment in agriculture, and increase revenue. Gertler, Legine, and Moretti (2009), Kaboski and Townsend (2011) also found that the villagers' credit provides some expected benefits to the economy.

Setyari (2012) suggests that the use of micro-credit by Indonesian households can increase per capita expenditure and the number of household members who work compared to families who do not get credit. Lal (2017), Schmidt (2016) states that financial inclusion through cooperatives has a direct and significant impact on poverty alleviation, where basic financing such as savings, insurance, and credit through inclusive finance has a positive impact. In further research, Lal (2018) states that the

spread of inclusive finance through cooperatives has a significant positive effect on rural development, especially women, children, minorities, very poor families, and victims of natural disasters.

The provision of credit by cooperative can improve the welfare of the community. In Indonesia, there are two credit distribution schemes namely formal credit by banks and non-formal credit by cooperatives, as institutions that have been considered to have contributed to the people's economy. However, in its implementation, cooperatives have higher interest rates than banks. Thus, this study aims to identify the effect of using cooperative credit on the welfare of households compared to the use of bank credit.

  • 3.    Methods

The method of analysis carried out by directly comparing bank credit users and cooperatives can lead to selection bias. Selection bias can arise because the user of cooperative credit are households or individuals who may not have an access to bank credit because customers cannot meet the requirements for obtaining bank credit or because of different community preferences for banks and cooperatives. These preferences are time-invariant and unobserved characteristics that can affect the outcome. Another bias that can arise is the

difference in the availability of banks and/or cooperatives within a region. Refers to Dwiputri (2017), in an effort to eliminate the bias, this study uses the fixed-effect method at the village level to identify the effect of the differences of using credit from cooperatives or banks on changes in Indonesian household welfare.

This study proxied welfare variable as household consumption (Cit). The outcome to be observed is the change of food, non-food consumption, and total per capita consumption related to the effect of the use of cooperative credit were compared with bank credit. To identify the impact of cooperatives in improving people’s welfare especially after the 1998-1999 recession, this study uses IFLS data to estimate changes in consumer spending when households use cooperative credit in period 1 (IFLS 3, year = 2000), and in the period 2 (IFLS 4, year = 2007). Therefore, this

research using panel data with two periods of 2000 and 2007. However, this study can identify differences in the effect of the use of cooperatives and banks credit on the welfare of Indonesian society. The model is as follows.

Cijt= α0 + β1D_Cooperative + β2Time +

β3Xijt + β4D_Residence + β4Yijt + μj + vijt ...... 1)

Cijt is a variable that declared the consumption of household i, village j, and

period t. D_ Cooperative is a dummy variable. Dummy 1 is households who use cooperative credit, and Dummy 0 for households using bank credit. Control variables represented by the variable characteristics of the household (Xijt), variable characteristics of credit (Yijt), and variable D_ Residence consisting of dummy 1 is a household residing in the village, and dummy 0 is a household residing in urban areas. Variable μj is a fixed effect at village level. While variable vijt is an error term. Error term to be assumed uncorrelated with the variable Cooperative, after being controlled by the village fixed effect estimation. Therefore, the model has been free from potential bias that would be appeared. According to Wooldridge (2003), village and household characteristics are unobserved, and time-invariant in influencing consumption will not cause bias in the estimation process with the technique of the village fixed effects.

  • 4.    Results and Discussion

The sample of panel data for IFLS3 and IFLS4 is 1455 households which are households who cooperative credit or bank credit users. From the descriptive analysis, it can be known that the average age of household head who uses cooperative credit is approximately 48 years, while the level of education on average is that of have graduated from junior high school. The

average periods of cooperative credit taken is 16 months with an average credit amount of IDR. 2,019,300 (the real value in year 2000). The number of households that use cooperative credit for consumptive purposes is higher than the number of households that use cooperative credit for productive purposes.

The data showed that the bank credit period taken on average is approximately 13 months with an average credit amount is IDR. 2,007,300 (the real value in year 2000). This value is not much different from the characteristics of the cooperatives’ credit.

The number of households that use bank credit for consumption is also higher than the number of households that use bank credit for productive purposes. Meanwhile, the average age of household head of bank credit users approximately 46 years with an average education level of the household head is Junior High School. Furthermore, an estimate of the difference in the effect of using cooperative credit compared to bank credit is carried out on the sample. The results of the analysis using a fixed effect regression method at the village level are shown in the following table.

Table 1. Impact of Cooperative Credit to the Food Consumption Expenditure in Households (real ln_consumption, the base year 2000) Panel Data

Variables

Consumption of Food

(1)

(2)

(3)

(4)

Credit characteristics:

The use of cooperatives credit (1 = use cooperatives credit)

0.0435

0.1279 *

0.1215

0.1271

The number of credits, in thousand

0.0772 ***

0.0796 ***

0.0755 ***

Rupiahs (Ln)

Credit period (months)

-0.0004

-0.0004

The purpose of credit (1 = Productive)

Household characteristics:

0.0422

The age of household head (years)

0.0030 **

0.0019

0.0019

0.0028 *

The gender of household head (1=male)

0.1257 **

0.1320 **

0.1329 **

0.1429 ***

The number of household members

0.0607 ***

0.0611 ***

0.0610 ***

0.0611 ***

The education of household head (years)

Characteristics of residence:

0.0356 ***

0.0248 ***

0.0249 ***

0.0263 ***

Residence (1 = village)

-0.0303

-0.0433

-0.0422

-0.0470

D_Time (1 = period of year 2000)

0.0826

-0.0318

-0.0252

-0.0253

R2 (%)

18.71

23.19

23.26

23.57

N

1,455

1,455

1,455

1,415

Note: ***: significant at α = 1%; **: significant at α = 5%; *: Significant at α = 10%

The age of household head, the male household head, the number of family members, and the education of the household head have a positive effect on food consumption expenditure. Nevertheless, the significance of the effect of the age variable varies for each model. The more family members, the higher the food expenditure because it is associated with a higher level of need. Male family heads have a higher level of food consumption expenditure than female family heads. This is because in general, the family's income comes from the two adults in the household, namely mother and father in the family. Meanwhile, for households with female household heads, the main family income is only come from the mother.

The education of the household head has a significant positive effect on food consumption expenditure. Following the theory of economic growth, a higher level of education has a higher probability of earning a higher income (Emiko, 2010). Duflo (2001) revealed that the program of education in Indonesia was able to increase

income and welfare. From the analysis, it can be seen that there are no difference in food consumption expenditures between households that use bank/cooperative credit who live in villages or urban areas.

By considering the goodness of fit in the results of regression analysis in Table 1, it can be concluded that in general, the impact of using cooperative credit does not have a significant difference with bank credit on household food expenditure. The significant variable effect the food consumption is the amount of credit. The amount of credit taken has a significant positive effect on household food consumption expenditure. It shows that the greater amount of credit, the higher the food consumption expenditure. It means that the amount of credit can have a significant positive effect on improving people's welfare. Meanwhile, the credit period does not have a significant effect on household food consumption expenditure. The purpose of taking credit for both productive and consumptive does not have a significant effect on food consumption expenditure of household.

Table 2. Impact of Cooperative Credit to the Non-food Consumption Expenditure in Households (real ln_consumption, the base year 2000) Panel Data

Variables                        Consumption of Non-food

  • (1)            (2)             (3)              (4)

Credit characteristics:

The use of credit cooperatives (1 = use credit cooperatives)

-0.2390 **

-0.0633

-0.0833

-0.0813

The  amount  of credits,   in

thousand Rupiahs (Ln)

0.1607 ***

0.1682 ***

0.1607 ***

Credit period (months)

-0.0015

-0.0014

The purpose of credit (1 = Productive)

0.0757

Household characteristics:

The age of household head (years)

0.0025

0.0002

0.0003 ***

0.0008

The gender of household head (1=male)

0.0302

0.0434

0.0460

0.0416

The   number   of  household

members

0.0773 ***

0.0782 ***

0.0779 ***

0.0764 ***

The education of household head (years)

Characteristics of residence:

0.0712 ***

0.0486 ***

0.0491 ***

0.0518 ***

Residence (1 = village)

-0.0637

-0.0908

-0.0872

-0.0997

D_Time (1 = period of 2000)

0.4107 ***

0.1722 **

0.1930 ***

0.1814 **

R2 (%)

25.52

33.14

33.29

33.15

N

1,455

1,455

1,455

1,415

Note: ***: significant at α = 1%; **: significant at α = 5%; *: Significant at α = 10%

the use of cooperative credit has a

From the analysis, it can be seen that more negative effect than the use of bank the household characteristics which have a credit to non-food expenditure. However, significant positive effect on non-food Model 2, 3, and 4 show insignificant effects. expenditures are the number of household It means that the effect of that variable is not members and education level of the robust. The results of the analysis concluded household head, as well as in the analysis of that cooperative credit have an insignificant household expenditure on food. The amount effect to non-food spending of the of credit taken has a significant positive household. Variable that can affect the noneffect on the spending of the non-food food consumption is the amount of credit. households. Model (1) Table 2 shows that

Table 3. Impact of Cooperative Credit to Total Consumption Expenditure of Household (real ln_total consumption, base year 2000) Panel Data

Variables

Total Consumption

(1)

(2)

(3)

(4)

Credit characteristics:

The use of credit cooperatives

-0.0933

0.0352

0.0225

0.0287

(1 = use credit cooperatives)

The amount of credits, in thousand

0.1175 ***

0.1222 ***

0.1153 ***

Rupiahs (Ln)

Credit period (months)

-0.0010

-0.0009

The purpose of credit

(1 = Productive)

Household characteristics:

0.0709 *

The age of household head (years)

0.0028 *

0.0011

0.0011

0.0018

The gender of household head (1=male)

0.0932

0.1029 *

0.1045 *

0.1080 **

The number of household members

0.0688 ***

0.0694 ***

0.0692 ***

0.0686 ***

The education of household head

0.0520 ***

0.0355 ***

0.0359 ***

0.0380 ***

(years)

Characteristics of residence:

Residence (1 = village)

-0.0417

-0.0615

-0.0592

-0.0679

D_Time (1 = period of 2000)

0.2273 ***

0.0530

0.0662

0.0589

R2 (%)

25.72

33.15

33.31

33.49

N

1,455

1,455

1,455

1,415

Note: ***: significant at α = 1%;

**: significant at α = 5%; *:

Significant at α

= 10%

Table 3 shows that size of the household members and level of education of household head have a significant positive effect on total consumption. The

amount of credit taken has a significant positive effect on total household consumption expenditure. Credit taken for productive purposes has a positive

significant 10% to total household expenditure. Table 3 concludes that cooperative credit has an insignificant effect to total expenditure of households. The variable has a significant effect to total consumption is the number of credits.

Table 4. Impact of the Use of Cooperatives Credit to per Capita Consumption of Households (real ln_konsumsi 2000) Panel Data

Variables

Per Capita Consumption

(1)

(2)

(3)

(4)

Credit characteristics:

The use of credit cooperatives

-0.0270

0.0941

0.0809

0.0929

(1 = use credit cooperatives)

The number of credits, in thousand

0.1108 ***

0.1158 ***

0.1093 ***

Rupiahs (Ln)

Credit period (months)

-0.0010

-0.0009

The purpose of credit (1 = Productive)

0.0860 **

Household characteristics:

The age of household head (years)

0.0069 ***

0.0053 ***

0.0054 ***

0.0062 ***

The gender of household head (1=male)

-0.0708

-0.0616

-0.0600

-0.0605

The number of household members

-0.0645 ***

-0.0639 ***

-0.0641 ***

-0.0632 ***

The education of household head

0.0535 ***

0.0379 ***

0.0383 ***

0.0398 ***

(years)

Characteristics of residence:

Residence (1 = village)

-0.1458 **

-0.1644 **

-0.1620 **

-0.1391 *

D_Time (1 = period of 2000)

0.0324

-0.1319 **

-0.1182 **

-0.1224 **

R2 (%)

21.98

28.70

28.88

28.89

N

1,455

1,455

1,455

1,415

Note: ***: significant at α = 1%; **: significant at α = 5%; *: Significant at α = 10%

The level of welfare can be measured by the amount of expenditure per capita. Therefore, the study should identify the impact of cooperative credit on consumption per capita to test the robustness as well as study of Dwiputri, Pradiptyo and Arsyad (2019), and Dwiputri, Arsyad & Pradiptyo (2018). Table 4 shows that the use of cooperative credit does not have a significant effect to amount of per capita expenditure in the household. The variables that are positive and significant in influencing per capita expenditure are the age of the household head, size of household

members, as well as the educational level of the household head. Urban households have significantly higher per capita consumption than households who live in rural. It shows that the level of urban household welfare is better than rural household if viewed from the perspective of per capita income. Additionally, per capita consumption of the households in 2007 was significantly higher than in 2000. It shows that the level of community welfare is increasing over time.

Characteristics of credit variables that have a significant positive effect on per capita household expenditure are the amount

of credit and the intended use of credit. The productive has a more positive effect than higher the number of credits would increase credit for consumptive purposes. per capita expenditure significantly. The use Cooperatives and banks have not of credit for productive purposes can also significantly different roles in enhancement significantly increase per capita expenditure the community prosperity. Cooperatives and compared to consumption credit.            banks have the same effect on the food, non-

From the analysis in Table 1, 2, 3, food, total, and per capita consumption of and 4, generally it can be concluded that the households in Indonesia. The results showed use of cooperatives or banks credit does not that the higher number of credits taken, the differ significantly affects to the level of more positive effect on the improvement of welfare. the finding suggests that the public welfare. In addition, the purpose of contribution of cooperatives to the credit used to productivity has a positive betterment of society can be equalized to a effect in enhancement the welfare of society bank, however, the interest rate of than consumption credit.

cooperative credit is higher than a bank. The 5. Conclusion

difference in interest rates between banks        Cooperative credit has an

and cooperatives in Indonesia is not insignificant effect to food consumption, significant in improving people's welfare. non-food consumption, total expenditure, Pradiptyo, Sugiyanto, Sumiyana, and and consumption per capita. Variable which Dwiputri (2013) found that the interest rate has a significant effect to food consumption, of cooperatives in Indonesia generally was non-food consumption, total expenditure, around 20-25%, while bank interest rate and consumption per capita is the amount of approximately 9-12%. However, banks and credit. Banks and cooperatives have the cooperatives have different target markets. same effect on improving welfare. Both Cooperatives tend to serve non- have their respective advantages where bank bankable communities. In their loan has a lower interest rate than cooperative. activities, several cooperatives use the funds On the other hand, cooperative have a close they credit from the bank. Therefore, banks relationship with the public because those and cooperatives have a unique partnership. who are non-bankable will use cooperatives Other findings are the more amount of credit to make loans. Cooperatives target non-is provided to the community, the higher bankable communities, and several effect of improving people's welfare. The cooperatives use bank service facilities in credit period has no significant effect on savings and loan operations. Therefore, improving people's welfare. Credit aimed to banks and cooperatives have a unique 69

relationship in improving

welfare. Further research can be done is identifying the effect of sharia loans on the betterment of society.

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