Promoting Sustainable Banking: The Role of Private Credit in Reducing CO2 Emissions in Indonesia

Abstract

The banking sector plays a pivotal role in Indonesia’s economic growth, making a substantial contribution to GDP while also influencing environmental sustainability through CO2 emissions. Despite numerous studies examining the relationship between banking development and environmental outcomes, there is a lack of research investigating the precise impact of banking activities, such as private credit distribution, on CO2 emissions. This study aims to address this gap by examining the interactions between deposit money banks (DMB), private credit (PC), gross domestic product (GDP), renewable energy usage, and CO2 emissions in Indonesia. The analysis employs an autoregressive distributed lag (ARDL) model to identify a significant negative relationship between GDP and CO2 emissions, challenging the conventional assumption that economic expansion inevitably leads to higher pollution levels. Furthermore, while DMB activities indicate a negative short-term impact on CO2 emissions, private credit has a positive short-term correlation, indicating inefficiencies in directing credit towards environmentally sustainable initiatives. These findings illustrate the challenging role of banking in influencing environmental outcomes and emphasize the necessity for policies that facilitate green financing and investments in renewable energy. Banks can play a pivotal role in supporting sustainable development by promoting sustainability in their financial practices.