SME Lending and Banking Sector Risk: Evidence from an Emerging Market

Abstract

This study analyzes the relationship between SME lending exposure and the risk of the banking sector in the context of a developing country, using aggregate banking data from Indonesia for the period 2018–2022. SME lending, which represents the proportion of financing for micro, small, and medium enterprises to total credit, constitutes a major component of bank assets with a distinctive risk profile and potential influence on the stability of the financial system. Secondary data were obtained from the Indonesian Economic and Financial Statistics (SEKI) published by Bank Indonesia and the non-performing loan (NPL) ratio indicators published by the World Bank. The data were processed using a descriptive–analytical approach with the aid of the R statistical software for ratio construction, trend analysis, and simple correlation testing. The results show that although SME lending exposure remained relatively stable, small variations in the financing proportion were positively correlated with aggregate risk. These findings reaffirm the importance of monitoring SME lending exposure as an integral part of the macroprudential supervision framework for the national banking system