Abstract
This paper uses data envelopment analysis (DEA) to investigate the technical efficiency of the Indonesian commercial banks over the period 2004-2009 using intermediation approach. The analysis is conducted based on common frontier of duration of study and ownership of the banks, namely state-owned banks and private banks. Then Tobit regression model is used to examine the influence of internal factors as bank characteristics to efficiency scores. The results of DEA show that Indonesian commercial banks could improve their technical efficiency by 10.5% on average and the scale inefficiency is dominating over pure technical inefficiency. The commercial state-owned banks are showing perfect efficiency during the period of study, and proven to be more efficient compared to the commercial private banks. Finally Tobit regression is revealing that higher asset scale and liquidity risk increase the efficiency of the bank, while the profitability is on the contrary.
Highlights
AND DEVELOPMENT OF INDONESIAN BANKING INDUSTRYBanking performance is one of the important pillars in developing a country
While this study examines the technical efficiency of Indonesian commercial banks in doing the intermediary role during the year of 2004-2009 and the relationship to internal factor of banks‟ characteristic that has not been covered in the previous studies
The average technical efficiency (TE) obtained by intermediation approach ranges between 0.804 (2004) and 0.929 (2006), with an overall mean over the entire period equal to 0.895 which indicates that banks could have saved 10.5% of inputs in order to produce the same level of output
Summary
Banking performance is one of the important pillars in developing a country. The intermediary function of a bank determines the flow of fund which is vital for economic competitiveness. Shenkar & Luo (2004) wrote that internal determinants for country competitiveness are Education (including Science and Technology), Economics (Macroeconomis Soundness), Finance and Internationalization. The importance of Bank as the facilitator of economic development in Indonesia is getting more. According to Bank Indonesia (BI), banks in Indonesia must perform four important functions: performing as financial intermediary, payment system support, setting and implementing monetary policy, and ensuring financialstability. It is believed that sound, transparent and prudent banking system is the prerequisite for further economic development of a nation (Indonesia Banking Booklet, 2010).
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