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Efficiency and Malmquist Indices of Productivity Change in Indonesian Banking

Muliaman D. Hadad, Maximilian Hall, Wimboh Santoso, Ricky Satria, Karligash Kenjegalieva (k.a.kenjegalieva@lboro.ac.uk) and Richard Simper (richard.simper@nottingham.ac.uk)
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Muliaman D. Hadad: Bank Indonesia, Jakarta, Indonesia
Wimboh Santoso: Bank Indonesia, Jakarta, Indonesia
Ricky Satria: Bank Indonesia, Jakarta, Indonesia

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: In this study we utilise a non-parametric, slacks-based model (SBM) approach to analyse efficiency and productivity changes for Indonesian banks over the period January 2006 to July 2007. Efficiency scores and Malmquist productivity indices are estimated using the approach for efficiency and super-efficiency estimation suggested by Tone (2001, 2002). Additionally, the Malmquist indices are decomposed into technical efficiency change and technological shift components. Using monthly supervisory data provided by Bank Indonesia we find that, under the intermediation approach to efficiency estimation, average bank efficiency was reasonably stable during the sample period, ranging between 70% and 82%, with 92 of the 130 banks in existence at that time having efficiency scores of over 70%, including 10 with (super)efficiency scores above unity. We also find that technical efficiencies under the Intermediation approach to describing the banking production process are relatively stable. Malmquist results for the industry suggest that the main driver of productivity growth is technological progress. A strategy based on the gradual adoption of newer technology, according to our results, thus seems to have the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.

Keywords: Indonesian Finance and Banking; Productivity; Efficiency. (search for similar items in EconPapers)
JEL-codes: C23 C52 G21 (search for similar items in EconPapers)
Date: 2008-08, Revised 2008-08
New Economics Papers: this item is included in nep-ban, nep-eff and nep-sea
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