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Assessing Banking Profit Efficiency Using Stochastic Frontier Analysis

Author

Listed:
  • Riko Hendrawan

    (Telkom University, Indonesia Author-2-Name: Azhar A. Nasution Author-2-Workplace-Name: Telkom University, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)

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) 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.

Suggested Citation

  • Riko Hendrawan, 2018. "Assessing Banking Profit Efficiency Using Stochastic Frontier Analysis," GATR Journals jfbr149, Global Academy of Training and Research (GATR) Enterprise.
    • Handle: RePEc:gtr:gatrjs:jfbr149
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    References listed on IDEAS

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    1. Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002. "Cost and profit efficiency in European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 33-58, February.
    2. Mamatzakis, E & Koutsomanoli-Filippaki, Anastasia & Pasiouras, Fotios, 2012. "A quantile regression approach to bank efficiency measurement," MPRA Paper 51879, University Library of Munich, Germany.
    3. Fadzlan Sufian, 2007. "Trends in the efficiency of Singapore's commercial banking groups," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 56(2), pages 99-136, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bank Efficiency; IDX; Stochastic Frontier Analysis; Indonesia.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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