Efficiency in Indonesian Banking: Recent Evidence

Muliaman D. Hadad, Maximilian Hall, Wimboh Santoso, Ricky Satria, Karligash Kenjegalieva () and Richard Simper ()
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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 one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during 2007. Using Tone’s (2001) input-oriented, non-parametric, slacks-based DEA model, and modifying it where necessary to deal with negative inputs and outputs (Sharp et al. 2006), we firstly estimate the relative average efficiencies of Indonesian banks, both overall, and by group, as determined by their total asset size and status. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to eliminate the ‘bias’ in the efficiency estimates and to formally test for the impact of size and status on Indonesian bank efficiency. The results from the initial analysis show that: (i) average bank efficiency within the industry during 2007 lay between 62% – 67%; (ii) the most efficient group of banks was the ‘state-owned’ group with an average efficiency score of over 90%, with the least efficient group being the ‘regional government-owned’ banks with average efficiency scores between 45% and 58%; (iii) ‘listed banks’ performed better, on average, than ‘non-listed banks’; and (iv) ‘Islamic banks’, despite their different operational structure when compared with conventional banks, enjoyed average efficiency scores between 54% and 74%. In the second stage of the analysis, the bias-corrected efficiency scores demonstrate that ‘regional government-owned’, ‘foreign exchange’, ‘non-foreign exchange’, ‘joint-venture’ and ‘foreign’ groupings were significantly less efficient than ‘state-owned’ banks, with the first-mentioned being the most inefficient and the other groupings ranked in ascending order of efficiency, as listed. Moreover, large banks were shown to be more efficient than their smaller counterparts, providing support for Bank Indonesia’s consolidation policies.

Keywords: Indonesian Finance and Banking; Efficiency. (search for similar items in EconPapers)
JEL-codes: C23 C52 G21 (search for similar items in EconPapers)
Date: 2008-11, Revised 2008-11
New Economics Papers: this item is included in nep-ban, nep-eff and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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