The role of organizational and external factors on bank efficiency : a panel data study of Indonesian banks, 1993-2008

Abstract

The main objectives of this study are to analyse the efficiency of Indonesian banks and examine the role of organizational and external factors on efficiency. The study was undertaken using a balanced panel data of 100 banks from 1993 to 2008. Four models of efficiency were specified based on two economic functions (cost and alternative profit) and two functional forms (the Translog and the Fourier-Flexible). The estimation was undertaken using a parametric approach, - stochastic frontier analysis (SFA) - under time-varying and truncated normal distribution conditions of the inefficiency components. Three outputs (aggregate loans, other earning assets and net off-balance-sheet incomes) and four prices of inputs (labour, funds, risk allowances and fixed assets) were specified as the main variables of the deterministic part of the SFA model. Six organization-specific (age, asset size, government ownership, foreign ownership, top management succession, involvement in foreign exchange businesses) and five external (market concentration, GDP per capita, inflation rate, exchange rate, interest/discount rate) factors are hypothesized to affect bank inefficiency and are incorporated in the stochastic part of the model.

The results indicate bank age, succession, competition, GDP and interest rate positively affect efficiency, while government and foreign ownership, involvement in foreign exchange activities, bank size, inflation and exchange rate negatively affect efficiency. Comparing efficiency scores across periods indicates that efficiency was significantly lower during the crisis (1998-1999) period compared to the pre-crisis (1993-1997) and post-crisis (2000-2008) periods, whereas a comparison of bank types indicates that government-owned banks were significantly less efficient than private banks. Among private banks, there was no significant difference in inefficiency between foreign and domestic private banks. This research suggests that the Indonesian banking industry on the whole became more efficient over time, especially during the post crisis period. Keywords: Bank efficiency, Indonesia, financial crisis, stochastic frontier analysis. -- provided by Candidate. Show more