Assessing Banking Profit Efficiency Using Stochastic Frontier Analysis

J. Fin. Bank. Review 3 (4) 67–76 (2018)

10 Pages Posted: 11 Jan 2019

Date Written: December 10, 2018

Abstract

Objective - The banking sector plays an important role in the Indonesian economy. The sustainability of the Indonesian banking sector will depend on the ability of every banking institution to maintain their competitiveness. Banking competitiveness is reflected in the level of efficiency of the banking system itself.

Methodology/Technique - The purpose of this research is to assess the efficiency of 21 banks on the IDX between 2008-2017 using Stochastic Frontier Analysis.

Findings - The findings of this research show a maximum efficiency score of 0.69 and the bank's average score among the research sample with the input and output allocation which can generate profits is 0.69 - 0.43 = 0.26. Overall, the banking sector in the Indonesian capital market between 2008 - 2017 recorded an efficiency score of 0.43. With this score, the banking system in the Indonesian capital market is still considered to be inefficient (0.43 <0.5). The results also demonstrate that the distribution of efficiency scores polarized in two poles. In the first pole, there were 11 banks that had a relatively good efficiency score (> = 0,5) and in the second pole, there were 10 banks with low efficiency scores (less than 0.5).

Novelty – From the results, it can be concluded that several output variables, such as total loans (Y1) and securities (Y3), and input variables such as prices of labor (W2) and inflation (Z), have a significant effect on banking profits. Meanwhile, input variables such as the price of fund variables or the total funds (W1) and the price of physical capital were reflected in the depreciation of fixed assets (W3), and the output variables of income and interest (Y2) had an insignificant effect on bank profits.

Keywords: Bank Efficiency; IDX; Stochastic Frontier Analysis; Indonesia

JEL Classification: G10, G14, G19

Suggested Citation

Hendrawan, Riko and Nasution, Azhar A., Assessing Banking Profit Efficiency Using Stochastic Frontier Analysis (December 10, 2018). J. Fin. Bank. Review 3 (4) 67–76 (2018). Available at SSRN: https://ssrn.com/abstract=3307369

Riko Hendrawan (Contact Author)

Telkom University ( email )

Jalan Telekomunikasi No.1
Terusan Buah Batu
Bandung, ID West Java 40257
Indonesia

Azhar A. Nasution

Telkom University

Jalan Telekomunikasi No.1
Terusan Buah Batu
Bandung, ID West Java 40257
Indonesia

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