Bank efficiency in Indonesia : (an empirical analysis using DEA)

Abstract

This research attempts to investigate the efficiency of banking industry specifically in Indonesia. Three objectives are identified for this study. The first objective is to compare efficiency of big-sized banks with efficiency of medium-sized banks whilst the second objective is to compare bank efficiency based on ownership criteria and the efficiency of Islamic banks vis-a vis conventional banks. The methodology applied in this research is non parametric approach using Data Envelopment Analysis (DEA) combine with Malmquist Index. The variables identify as inputs are total deposit, personal expenses and capital expenditures while the outputs are loan and advances, capital market investment and money market investment. This research used financial data of 50 banks in Indonesia. These banks are classified into two groups: big-sized and medium-sized banks. The result shows that big-sized banks are more efficient than medium-sized banks and foreign banks are more efficient compared to other types of banks either in big-sized or medium-sized banks category. Lastly, the efficiency of Islamic banks is relatively higher than the average efficiency of conventional banks. Malmquist Index also produces almost similar results. Malmquist Total Factor Productivity (TFP) index of big-sized banks is higher than the TFP index of medium-sized banks and the TFP Index of Islamic banks is higher than TFP index of average conventional banks.