Does fintech lending expansion disturb financial system stability? Evidence from Indonesia

Literature suggests two contradictory views regarding the impacts of fintech lending on banks. The competition-instability proponents believe that expansion erodes bank market and threatens banks as traditional intermediaries, thereby intensifying risk-taking potentially disturbing financial stability. In contrast, competition-stability reduces asymmetric information in credit market, thus reducing increasing resilience to a systematic shock. This paper aims examine bank-risk taking, i.e., channeling activity risk. study utilizes OLS, random effects, fixed two-step GMM regressions test conjectures. Consistent with hypothesis, our evidence indicates shadow banking increases actively seek channels diversify their risks but are less likely use channel. also corroborates notion encourages risks. Pertaining relationship between risk, results suggest work more efficiently improve quality rather than intensify risk-taking. These findings indicate synergy would increase quality. examines reasonable limits for firms based MSMEs’ characteristics. Employing threshold regression, we find IDR5 billion is maximum provision induce profitability MSMEs whereas IDR6 minimize default risk MSMEs.