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Abstract
This study examines cost efficiency of Indonesian commercial banks during the period 2002–2010. The period testifies a recovery period post-Asian Financial Crisis 1997–1998 and post-bank restructuring and recapitalisation programme of 1997–2001. Stochastic frontier analysis is employed to estimate bank cost efficiency with the Battese-Coelli 1992 (BC92) and standard-pooled methods with the two-stage analysis. TOBIT regression is also used to reveal the determinants of Indonesian banks’ cost efficiency over the period.
The findings of the study show that the average cost efficiency of Indonesian banks were likely to incline over the study period. Among all models examined, it is proven that bank size, profitability, capital adequacy, loans to deposit, and credit risk management are those of internal variables affecting the Indonesian bank cost efficiency over the study period. Meanwhile, all macroeconomic indicators included in the models are also significant in affecting Indonesian bank cost efficiency during the period.
Notes
1 The recapitalisation program valued at IDR 658 trillion was equal to 52% of GDP in 2000 (CitationSato, 2005).
2 The liquidation was applied to the banks included in the category C which had a capital adequacy ratio (CAR) of less than minus 25% (CitationFane & McLeod, 2002).
3 They employed the ratio of private credit to GDP to reflect the financial market depth in the countries.
4 They used the three firms’ concentration ratio for representing a market structure where the commercial banks operate. The three firms’ concentration ratio is the proportion of the three largest banks’ total assets over the banks’ total assets in the sample.
5 Trade openness is measured by the sum of export and import as a percentage of GDP (CitationFang et al., 2011).
6 Loan provision represents the credit risk of a bank.
7 Loans deposits ratio is a proxy for a bank liquidity risk.
8 Equity to total assets denotes a bank capital risk.
9 Non-interest income to interest income represents market risk for a bank.
10 They use a learner index for a proxy for a market power. Learner index is calculated by the mark-up of the price over marginal cost and divided by the price (CitationFang et al., 2011)
11 For representing the institutional development, they employ the development in banking regulatory reforms, privatization, and enterprise corporate governance restructuring (CitationFang et al., 2011).
12 Old foreign owned banks refer to banks that are majority owned by foreign owners that were established before the crisis, whilst new foreign banks are the banks majority owned by foreign owners that were established after crisis and as a result of foreign acquisitions.
13 For the small business finance items, some banks in the sample do not provide finance to small businesses, and then a fixed value of 0.001 is added to the variable all over the sample to be able to estimate the models. This is a common procedure in the literature in order to avoid loss of data.
14 The regulation about the minimum SBF requirements for Indonesian commercial banks (The Package of January 1990) was revoked by BI Regulation Number 3/2/PBI/2001 about Small Business Finance on January 4, 2001.
15 Average cost efficiency of the three models over the period 2002–2010 are 0.8464, 0.8392, and 0.8115 for the models 1, 2 and 3 respectively.
16 Average cost efficiency of the three models derived from BC92 estimation over the period 2002-2010 are 0.7145 for model 1, 0.8036 for model 2, and 0.6431 for model 3.
17 The average CAR of Indonesian commercial banks over the study period was 24.01% (it was higher than the minimum CAR imposed by the Indonesian bank authority of 8%).
18 The policies relating to those factors i.e. bank mergers and acquisitions, capital adequacy requirement, and bank liquidity and risk management.
19 The role of government is needed in creating conducive conditions, stimulating economic activities, and maintaining economic stability reflected by low inflation rate, high economic growth and lower unemployment rate.