The Efficiency of Indonesian Commercial Banks: Does the Banking Industry Competition Matter?

Sajida Sari, Shochrul Ajija, Wasiaturrahma Wasiaturrahma and Raja Adzrin Raja Ahmad
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Sajida Sari: Department of Economics, Faculty Economics and Business, Airlangga University, Surabaya 60286, Jawa Timur, Indonesia
Wasiaturrahma Wasiaturrahma: Department of Economics, Faculty Economics and Business, Airlangga University, Surabaya 60286, Jawa Timur, Indonesia
Raja Adzrin Raja Ahmad: Faculty of Accountancy, Universiti Teknologi MARA, Segamat 85000, Johor, Malaysia

Sustainability, 2022, vol. 14, issue 17, 1-16

Abstract: This study examines the effect of banking industry competition on the efficiency of commercial banks in Indonesia from 2010 to 2019. First, using data envelopment analysis (DEA), the results showed that the commercial banks in Indonesia are moderately efficient. Second, this study uses H-statistics, obtained through the Panzar–Rosse model, to measure the level of competition. The results showed that the banking industry competition in Indonesia is a monopolistic market. In addition, this study also analysed other factors affecting bank efficiency, namely non-performing loans (NPL), loan to deposit ratio (LDR), capital adequacy ratio (CAR), bank size, and economic growth. This study used the Tobit estimation method to analyse the effect of competition and other variables. The results showed that tighter competition in the banking industry reduces the commercial banks’ efficiency. The results of this study support the competition-inefficiency hypothesis. Other variables such as CAR, LDR, and economic growth had a significant effect on bank efficiency. Meanwhile, the NPL variable and bank size had no significant effect.

Keywords: efficiency; competition; commercial banks; competition-inefficiency hypothesis (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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