Experimental Study on the Impact of Ethnic Stereotypes on Credit Risk Assessment in Indonesian Small and Medium Enterprises

The rich diversity of Indonesia in geography, culture, ethnicity, and race can result in stereotypes, negatively affecting credit decision-making in the banking sector. Such stereotyping can result in biased credit evaluations for loan proposals, restricting access to financial services for particular groups, even when their applications are valid. This initial study investigated the impact of stereotype bias on credit decisions in the Indonesian banking system via experiments involving groups of Indonesian bankers, each comprising two bankers of equal rank from different divisions (the business and risk unit). Both bankers were authorized to make credit decisions for small and medium enterprises. During group discussions, they reviewed modified loan proposals that contained stereotypes, decided on loan approval, and rated their confidence in the loan’s potential success. The findings revealed that stereotype bias affected decisions in two of the three experiments. In one instance, an objectively approved loan was rejected due to the applicant’s ethnic background. Additionally, the results suggested that social conformity within the groups above masked the impact of stereotype bias.