Abstract
By issuing Indonesian Banking Architecture in 2004, the central bank of Indonesia has encouraged banking sector to consolidate. The aim of merger among others is to increase bank economies of scale. This study tries to look at the impact of merger bank on the bank performance by implementing structure conduct and performance hypothesis. Merger bank affects market structure. According to structure conduct and performance hypothesis, market structure affects bank behavior as well as bank performance. The result of this study suggests that an increase in market concentration causes a decrease in price. It shows that merger increase economies of scale so that bank can offer lower price. A decrease in price brings down bank profitability. Concentration ratio also can be used as competition measurement. It is known as a structural measure of competition. Using the structural measure, a lower competition that is shown by higher concentration ratio is associated with lower profitability. This research also analyses the relationship between competition and bank profitability using Lerner index as a non-structural measure of competition. The non-structural measure of competition shows that lower competition is associated with higher profitability. Hence, the structural measure of competition creates different result from the non-structural measure of competition.
Highlights
In 2004, Bank Indonesia as the banking supervisory authority encouraged banks to conduct consolidation
PRICE is calculated by dividing total revenue by total loan; market structure is concentration ratio measured by HHI and CR4
5 Conclusion and policy recommendation From the above research findings, this study proposes some policy recommendations such as support to continue the consolidation policy in Indonesia banking sector, monitoring different measurement of competition and disperse the ownership structure
Summary
In 2004, Bank Indonesia as the banking supervisory authority encouraged banks to conduct consolidation. The result shows that market structure determines the profitability of the Malaysian banking industry suggesting SCP hypothesis is held in Malaysia banking sector. With regard to profit–structure relationship in Indonesia’s banking industry, Silalahi et al (2015) who utilize quarterly data of 98 commercial banks from 2005–2014 have investigated the relationship between concentration ratio and market share to the performance of banks and shows that in Indonesia banking sector the SCP hypothesis is held.
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