Has regulatory reform had any impact on bank efficiency in Indonesia? A two-stage analysis

ABSTRACT

More than a decade following the severe economic crisis 1997, Indonesia has undergone major regulatory changes in its banking industry. This article examines the impact of these regulatory changes on the relative technical efficiency (TE) of the Indonesian banking industry employing data envelopment analysis (DEA) and censored Tobit regression model. Additionally, the bootstrap approach of Simar and Wilson is employed to provide statistical properties to the DEA efficiency score. The findings show that the industry on average is inefficient over the period of analysis. Also, state-owned and foreign-owned banks are found to be more efficient than any other group of banks. Finally, the impact of regulatory reforms is generally positive and statistically significant.

KEYWORDS:

• Bank efficiency
• bootstrap
• data envelopment analysis
• Indonesia

JEL CLASSIFICATION:

• G21
• G28
• G34
• C14

Acknowledgements

This article is based on first author’s PhD thesis submitted to Curtin University. The first author is grateful to the Indonesian government for providing her DIKTI scholarship to study at Curtin University. The helpful suggestions of an anonymous referee are greatly appreciated. However, authors remain responsible any error remains.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Calculated from Indonesian banking statistic, Bank Indonesia (2000–2011).

² A popular alternative approach is stochastic frontier analysis (SFA). Choosing between SFA and data envelopment analysis (DEA) depends on several circumstances such as, data and assumptions about price information. Coelli et al. (2005) argue that if random noises are less an issue, price information is not available, the cost minimization or the profit maximization assumption are difficult to justify or the firm produces various outputs, then the DEA method is commonly chosen.