THE EFFICIENCY OF BANKS IN INDONESIA: SHARIA VS. CONVENTIONAL BANKS

Abstract

This paper evaluates the performance of Indonesian banking sector, focusing on technical efficiency of sharia and conventional banks along with the determinants of its efficiency during the period 2002-2010. Data Envelopment Analysis is employed to estimate banks technical efficiency and Tobit-regression is used to reveal the determinants of the efficiency over the panel data of 116 banks, including 109 conventional banks and 7 sharia banks. The result shows that sharia banks outperformed conventional banks in one model when it takes into account small business finance (SBF) as one of the output components in the model. Sharia banks have higher average SBF portfolio than those of conventional banks’ portfolio. The result indicates the efforts of Indonesian sharia banks to obey one of the principles in Islamic banking, “the emphasis on Islamic principles of morality”. By observing all models, it is concluded that the size of the bank, capital adequacy and liquidity are of banks characteristic factors which are very important to increase banks’ efficiency