Questioning the Intermediation Function of National Banking
Stability is an absolute prerequisite for the sustainability of the banking industry. Without it, public trust would fade and the intermediation function would lose its foundation. However, stability was never meant to be the end goal. Its value is only truly felt when it drives productive economic activity. This is the challenge facing Indonesian banking today: how to ensure that ample liquidity does not merely remain as balance sheet strength, but flows into financing that expands production capacity, investment, and employment opportunities.
Soedarmono et al. (2023) state that banks’ lending decisions in Indonesia are influenced by a combination of liquidity conditions, asset quality, capital adequacy, and economic prospects. When uncertainty rises, banks tend to tighten financing selection (selective lending) to maintain portfolio quality. This step is rational from a risk management perspective, but it simultaneously shows that large liquidity does not automatically translate into productive financing. This finding reinforces the view of Freixas and Rochet (2008) that a bank’s main function is not to collect funds, but to transform those funds into value-adding investments.
An increase in risk perception essentially encourages banks to form larger reserves, thereby limiting the room for financing expansion (Soedarmono et al., 2022). Thus, the relationship between fund collection and credit distribution is not linear. What determines the effectiveness of intermediation is not merely the size of liquidity, but the bank’s ability to maintain a balance between prudence and the courage to take measured risks. This is where stability is tested: not only in its capacity to withstand risk, but also in its ability to keep open the space for financing productive economic activities.
The implications of this issue are very real for Indonesia, given that MSMEs, the processing industry, agriculture, and various other productive sectors still require sustainable financing support. The Government’s mandate to national banks to increase financing for MSMEs should not be understood merely as an administrative target. This mandate must be seen as an effort to ensure that public funds truly return to the community in the form of economic activities that create added value. The intermediation function is ultimately measured not by the amount of credit disbursed, but by its ability to strengthen productivity, expand employment opportunities, and enhance national economic competitiveness.
Managing the Mandate, Maintaining Trust
Public funds deposited in banks are essentially a public trust. This mandate does not stop at the obligation to safeguard customer deposits, but also demands that the funds collected be used to drive the economy. Here, the intermediation function takes on a dimension broader than mere business activity. Banks are not only tasked with managing risk, but also bear the responsibility to ensure that public trust is translated into financing that supports investment, businesses, and job creation. It is in this context that governance acquires strategic meaning, not as a mere compliance tool, but as a foundation that maintains the balance between prudence and productivity.
Nurkhin et al. (2024) show that better governance correlates with a declining non-performing loan ratio in Indonesian banking. This means that good governance is reflected not only in regulatory compliance, but also in the quality of financing decisions. This finding aligns with the G20/OECD Principles of Corporate Governance (OECD, 2023), which position governance as the foundation for accountable, transparent, and long-term oriented decision-making. Thus, governance is not an obstacle to credit expansion, but a prerequisite for the intermediation function to remain healthy and sustainable.
What is truly being tested is not the banking sector’s ability to collect funds, but its ability to transform trust into productivity. The ever-increasing public funds represent a large economic capital, but this capital is not yet fully meaningful if it stops as liquidity rather than flowing back as financing that strengthens business activities. Therefore, the measure of banking success should not stop at institutional stability. What is more important is whether that stability can generate productive investment, strengthen MSMEs, encourage industrial transformation, and create broader employment opportunities. It is at this point that the intermediation function finds its relevance as a bridge between financial stability and economic development.
This perspective also shifts how we read banking performance. Capital ratios, liquidity, profitability, and asset quality remain important indicators as they reflect institutional health. However, these indicators do not fully describe the economic benefits generated. Banking performance should also be assessed by its ability to transform public funds into financing that increases national productivity. With this perspective, stability is no longer understood as the end goal, but as the foundation for more inclusive and sustainable economic growth.
Conclusion
In truth, public trust does not end when funds are deposited in a bank; rather, that trust finds its meaning when it returns to the community in the form of productive financing. It is between these two points that the intermediation function is truly tested. Therefore, questioning the banking intermediation function does not mean questioning the health of the Indonesian banking industry. On the contrary, it is precisely because the industry is stable that the mandate to transform public trust into productivity must be fulfilled.