Financial performance of rural banks in Indonesia: A two-stage DEA approach

Wasiaturrahma Wasiaturrahma,Raditya Sukmana,Shochrul Rohmatul Ajija,Sri Cahyaning Umi Salama,Ahmad Hudaifah

doi:10.1016/j.heliyon.2020.e04390

Abstract

This study aims to analyze the efficiency performance of conventional and Islamic rural banks in Indonesia, specifically, Bank Perkreditan Rakyat (BPR) and Bank Pembiayaan Rakyat Syariah (BPRS). Using a DEA approach, the results indicate that both BPR and BPRS are still inefficient in terms of the intermediation role but are efficient in production. Furthermore, the Tobit estimation show that these two efficiency results are positively affected by location and the capital adequacy ratio (CAR). These rural banks operating in cities tend to have a higher level of efficiency than otherwise. Moreover, the higher the capital, the more efficient both Islamic and conventional rural banks in terms of production and intermediation.

Highlights

Microfinance institutions (MFIs) are alternative financial providers for communities that are not covered by the banking sector
By De Yure, Bank Perkreditan Rakyat (BPR) was first recognized in the De facto on October 27, 1988, as part of the Financial, Monetary and Banking Policy Package
The institution is basically a new name for several financial institutions built by Bank Rakyat Indonesia (BRI) namely Bank Desa, Lumbung Desa, Bank Pasar, Bank Pegawai Lumbung Pilih Nagari (LPN), Lembaga Perkreditan Desa (LPD), Badan Kredit Desa (BKD), Badan Kredit Kecamatan (BKK), Kredit Usaha Rakyat Kecil (KURK), Lembaga perkreditan Kecamatan (LPK), Bank Karya Desa (BKPD) and other similar institutions

Summary

Introduction

Microfinance institutions (MFIs) are alternative financial providers for communities that are not covered by the banking sector. Most MFIs operate in developing countries (Forcella and Hudon, 2016), such as Sri Lanka (Alawattage et al, 2018), Senegal (Scanlon et al, 2019), India (Baland et al, 2019), Indonesia (Adnan and Ajija, 2015), and other developing countries. In these countries, the existence of microfinance institutions is very important as it affects household loans from information sources in the village economy and provides access to new business opportunities (Islam et al, 2015). Based on their legal entity, according to Law No

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