THE CONVERGENCE TEST OF INDONESIA BANKING INEFFICIENCY: DO MACROECONOMIC INDICATORS MATTER?
Keywords:
Global Crisis, Convergence, Inefficiency, Banking
Abstract
This paper analyzes the inefficiency convergence of Indonesian banks using Stochastic
Frontier Analysis and panel data estimation, covering the period after financial crisis
2008 until 2017. This paper also investigates the determinant of this inefficiency
implying the convergence. To estimate the inefficiency rate, proxied by price of
loan, this paper uses three inputs including price of labor, price capital, and price of
fund. Our analysis shows that during 2008-2017 the inefficiency score converged at
a speed of 26.2 %. Furthermore inflation, gross domestic product, and exchange rate
significantly affect the growth of inefficiency convergence. This paper contributes to
the empirical literatures particularly on banking research. Overall, the findings imply
that policymakers can mitigate the effects of the global financial crisis by lowering
interest rate, providing fiscal stimulus, as well as protecting the poorest from financial
deterioration.
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References
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stochastic frontier production function models. Journal of Econometrics, 6(1),
21–37.
Al-jarrah, I., & Molyneux, P. (2006). Cost Efficiency, Scale Elasticity and Scale
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Amsler, C., Lee, Y. H., & Schmidt, P. (2009). A Survey of Stochastic Frontier Models
and Likely Future Developments. Seoul Journal of Economics, 22(1).
Balassa, B. (1978). Exports and economic growth: further evidence. Journal of
Development Economics, 5(2), 181-189.
Barro, R. J., Sala-i-Martin, X., Blanchard, O. J., & Hall, R. E. (1991). Convergence
across states and regions. Brookings Papers on Economic Activity, 107-182.
Barro, R. J., & Xavier, S.-M. (2004). Economic Growth Second Edition. The MIT Press.
Barro, R. J., & Sala-i-Martin, X. (1992). Convergence. Journal of Political
Economy, 100(2), 223-251.
Basri, M. C., & Siregar, R. Y. (2009). Navigating Policy Responses at The National
Level In The Midst Of The Global Financial Crisis: The Experience Of
Indonesia. Asian Economic Papers, 8(3), 1-35.
Basri, M. C. (2013). A Tale of Two Crises: Indonesia’s Political Economy. JICA-RI
Working Paper, (57), 1–37.
Battese, G. E. (1992). Frontier Production-Functions and technical efficiency - A
Survey of empirical applications in agricultural-economics. Agricultural
Economics, 7, 185–208.
Battese, G. E., & Coelli, T. (1995). A model for Technical Inefficiency effects in a
Stochastic Frontier Production Function. Empirical Economics, 20, 325–332.
Baumol, W. J. (1986). Productivity Growth, Convergence, and Welfare: What the
Long-run Data Show. American Economic Review, 76(5), 1072–1085.
Becerril-Torres, O. U., Álvarez-Ayuso, I. C., & Del moral-Barrera, L. E. (2010). Do
infrastructures influence the convergence of efficiency in Mexico? Journal of
Policy Modeling, 32(1), 120–137.
Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in
commercial banks. Journal of Banking and Finance, 21(6), 849–870.
Berger, A. N., & Humphrey, D. B. (1991). The dominance of inefficiencies over
scale and product mix economies in banking. Journal of Monetary Economics,
28(1), 117–148.
Bolt, W., de Haan, L., Hoeberichts, M., van Oordt, M. R. C., & Swank, J. (2012). Bank
profitability during recessions. Journal of Banking and Finance, 36(9), 2552–2564.
Calza, A., Manrique, M., & Sousa, J. (2006). Credit in the euro area: An empirical
investigation using aggregate data. Quarterly Review of Economics and Finance,
46(2), 211–226.
Casu, B., & Girardone, C. (2010). Integration and efficiency convergence in EU
banking markets. Omega, 38(5), 260–267.
Casu, B., & Molyneux, P. (2003). A comparative study of efficiency in European
banking. Applied Economics, 35(17), 1865–1876.
Coelli, T. (Ed.). (2003). A Primer on Efficiency Measurement for Utilities and Transport
Regulators (Vol. 953). World Bank Publications.
Coelli, T. J., Rao, D. S. P., O’Donnell, C. J., & Battese, G. E. (2005). An introduction to
efficiency and productivity analysis. Springer Science & Business Media.
Cole, D. C., & Slade, B. F. (1998). Why Has Indonesia’s Financial Crisis Been so
Bad? Bulletin of Indonesian Economic Studies, 34(2), 61–66.
Collin, P. H. (2010). Dictionary of Banking and Finance: Over 9,000 Terms Clearly
Defined. Great Britain: Peter Coolin Publishing
Combey, A., & Togbenou, A. (2017). The Bank Sector Performance and
Macroeconomics Environment: Empirical Evidence in Togo. International
Journal of Economics and Finance, 9(2), 180.
Farrell, M. J. (1957). The Measurement of Productive Efficiency. Journal of the Royal
Statistical Society. Series A (General), 120(3), 253-290
Fried, H. O., Schmidt, S. S., & Yaisawarng, S. (1999). Incorporating the Operating
Environment into a Nonparametric Measure of Technical Efficiency. Journal of
Productivity Analysis, 12(3), 249–267.
Fries, S., & Taci, A. (2005). Cost efficiency of banks in transition: Evidence from
289 banks in 15 post-communist countries. Journal of Banking & Finance, 29(1),
55-81.
Gallizo, J. L., Moreno, J., & Pop, I. I. (2011). Banking efficiency and European
integration. Implications of the banking reform in Romania. Annales
Universitatis Apulensis: Series Oeconomica, 13(2), 432.
Hadad, M. D., Hall, M. J. B., Kenjegalieva, K. A., Santoso, W., & Simper, R.
(2011). Banking efficiency and stock market performance:an analysis of listed
Indonesian banks. Review of Quantitative Finance and Accounting, 37(1), 1–20.
Huybens, E., & Smith, B. D. (1998). Financial market frictions, monetary policy,
and capital accumulation in a small open economy. Journal of Economic Theory,
81(2), 353–400.
Jiménez, G., Ongena, S., Peydró, J. L., & Saurina Salas, J. (2010). Credit supply:
Identifying balance-sheet channels with loan applications and granted loans.
Working Paper No. 1179
Kneller, R., & Stevens, P. A. (2003). The specification of the aggregate production
function in the presence of inefficiency. Economics Letters, 81(2), 223-226.
Kumbhakar, S. C., & Lovell, C. A. K. (2000). Stochastic Frontier Analysis. Cambridge
: University Press Cambridge.
Kumbhakar, S. C., & Wang, H. J. (2005). Estimation of growth convergence using a
stochastic production frontier approach. Economics Letters, 88(3), 300-305.
Kuussaari, H. and Vesala, J. (1995). The efficiency of Finnish banks in producing
payment and account transactions, Working Paper, Bank of Finland.
Koopmans, T. C. (1951). Activity Analysis of Production and Allocation. New York:
Waley
Mas, M., Maudos, J., Pérez, F., & Uriel, E. (1998). Public capital, productive
efficiency and convergence in the Spanish regions (1964–93). Review of Income
and Wealth, 44(3), 383-396.
Margono, H., Sharma, S. C., & Melvin, P. D. (2010). Cost efficiency, economies of scale, technological progress and productivity in Indonesian banks. Journal of
Asian Economics, 21(1), 53–65.
Miller, S. M., & Noulas, A. G. (1996). The technical efficiency of large bank
production. Journal of Banking and Finance, 20(3), 495–509.
Nuryartono, N., Anggraenie, T., & Firdaus, R. S. (2012). Efficiency level of BPR:
Study of stochastic frontier analysis with an approach of time varying decay.
International Research Journal of Finance and Economics, 85(January), 6–13.
Olson, D., & Zoubi, T. (2017). Convergence in bank performance for commercial
and Islamic banks during and after the Global Financial Crisis. Quarterly
Review of Economics and Finance, 65, 71–87.
Patten, R. H., Rosengard, J. K., & Johnston, D. E. (2001). Microfinance success
amidst macroeconomic failure: The experience of bank Rakyat Indonesia
during the East Asian crisis. World Development, 29(6), 1057–1069.
Quah, D. (1996). Empirics for economic growth and convergence. European
Economic Review, 4, 1353–1375.
Ramsey, F. P. (1928). A mathematical theory of saving. The economic journal, 38(152),
543-559.
Sealey, C. W. J., & Lindley, J. T. (1977). Inputs, Outputs, and a Theory of Production
and Cost at Depository Financial Institutions. Journal of Finance, 32(4), 1251–
1266.
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. Source: The
Quarterly Journal of Economics, 70(1), 65–94.
Sun, L., & Chang, T. P. (2011). A comprehensive analysis of the effects of risk
measures on bank efficiency: Evidence from emerging Asian countries. Journal
of Banking and Finance, 35(7), 1727–1735.
Sufian, F., & Habibullah, M. S. (2010). Assessing the impact of financial crisis on
bank performance: Empirical evidence from Indonesia. ASEAN Economic
Bulletin, 245-262.
Weill, L. (2009). Convergence in banking efficiency across European countries.
Journal of International Financial Markets, Institutions and Money, 19(5), 818–833.
Zhang, T., & Matthews, K. (2012). Efficiency convergence properties of Indonesian
banks 1992-2007. Applied Financial Economics, 22(17), 1465–1478.
stochastic frontier production function models. Journal of Econometrics, 6(1),
21–37.
Al-jarrah, I., & Molyneux, P. (2006). Cost Efficiency, Scale Elasticity and Scale
Economies in Arab Banking. Banks and Bank Systems, 1(3), 60–89.
Amsler, C., Lee, Y. H., & Schmidt, P. (2009). A Survey of Stochastic Frontier Models
and Likely Future Developments. Seoul Journal of Economics, 22(1).
Balassa, B. (1978). Exports and economic growth: further evidence. Journal of
Development Economics, 5(2), 181-189.
Barro, R. J., Sala-i-Martin, X., Blanchard, O. J., & Hall, R. E. (1991). Convergence
across states and regions. Brookings Papers on Economic Activity, 107-182.
Barro, R. J., & Xavier, S.-M. (2004). Economic Growth Second Edition. The MIT Press.
Barro, R. J., & Sala-i-Martin, X. (1992). Convergence. Journal of Political
Economy, 100(2), 223-251.
Basri, M. C., & Siregar, R. Y. (2009). Navigating Policy Responses at The National
Level In The Midst Of The Global Financial Crisis: The Experience Of
Indonesia. Asian Economic Papers, 8(3), 1-35.
Basri, M. C. (2013). A Tale of Two Crises: Indonesia’s Political Economy. JICA-RI
Working Paper, (57), 1–37.
Battese, G. E. (1992). Frontier Production-Functions and technical efficiency - A
Survey of empirical applications in agricultural-economics. Agricultural
Economics, 7, 185–208.
Battese, G. E., & Coelli, T. (1995). A model for Technical Inefficiency effects in a
Stochastic Frontier Production Function. Empirical Economics, 20, 325–332.
Baumol, W. J. (1986). Productivity Growth, Convergence, and Welfare: What the
Long-run Data Show. American Economic Review, 76(5), 1072–1085.
Becerril-Torres, O. U., Álvarez-Ayuso, I. C., & Del moral-Barrera, L. E. (2010). Do
infrastructures influence the convergence of efficiency in Mexico? Journal of
Policy Modeling, 32(1), 120–137.
Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in
commercial banks. Journal of Banking and Finance, 21(6), 849–870.
Berger, A. N., & Humphrey, D. B. (1991). The dominance of inefficiencies over
scale and product mix economies in banking. Journal of Monetary Economics,
28(1), 117–148.
Bolt, W., de Haan, L., Hoeberichts, M., van Oordt, M. R. C., & Swank, J. (2012). Bank
profitability during recessions. Journal of Banking and Finance, 36(9), 2552–2564.
Calza, A., Manrique, M., & Sousa, J. (2006). Credit in the euro area: An empirical
investigation using aggregate data. Quarterly Review of Economics and Finance,
46(2), 211–226.
Casu, B., & Girardone, C. (2010). Integration and efficiency convergence in EU
banking markets. Omega, 38(5), 260–267.
Casu, B., & Molyneux, P. (2003). A comparative study of efficiency in European
banking. Applied Economics, 35(17), 1865–1876.
Coelli, T. (Ed.). (2003). A Primer on Efficiency Measurement for Utilities and Transport
Regulators (Vol. 953). World Bank Publications.
Coelli, T. J., Rao, D. S. P., O’Donnell, C. J., & Battese, G. E. (2005). An introduction to
efficiency and productivity analysis. Springer Science & Business Media.
Cole, D. C., & Slade, B. F. (1998). Why Has Indonesia’s Financial Crisis Been so
Bad? Bulletin of Indonesian Economic Studies, 34(2), 61–66.
Collin, P. H. (2010). Dictionary of Banking and Finance: Over 9,000 Terms Clearly
Defined. Great Britain: Peter Coolin Publishing
Combey, A., & Togbenou, A. (2017). The Bank Sector Performance and
Macroeconomics Environment: Empirical Evidence in Togo. International
Journal of Economics and Finance, 9(2), 180.
Farrell, M. J. (1957). The Measurement of Productive Efficiency. Journal of the Royal
Statistical Society. Series A (General), 120(3), 253-290
Fried, H. O., Schmidt, S. S., & Yaisawarng, S. (1999). Incorporating the Operating
Environment into a Nonparametric Measure of Technical Efficiency. Journal of
Productivity Analysis, 12(3), 249–267.
Fries, S., & Taci, A. (2005). Cost efficiency of banks in transition: Evidence from
289 banks in 15 post-communist countries. Journal of Banking & Finance, 29(1),
55-81.
Gallizo, J. L., Moreno, J., & Pop, I. I. (2011). Banking efficiency and European
integration. Implications of the banking reform in Romania. Annales
Universitatis Apulensis: Series Oeconomica, 13(2), 432.
Hadad, M. D., Hall, M. J. B., Kenjegalieva, K. A., Santoso, W., & Simper, R.
(2011). Banking efficiency and stock market performance:an analysis of listed
Indonesian banks. Review of Quantitative Finance and Accounting, 37(1), 1–20.
Huybens, E., & Smith, B. D. (1998). Financial market frictions, monetary policy,
and capital accumulation in a small open economy. Journal of Economic Theory,
81(2), 353–400.
Jiménez, G., Ongena, S., Peydró, J. L., & Saurina Salas, J. (2010). Credit supply:
Identifying balance-sheet channels with loan applications and granted loans.
Working Paper No. 1179
Kneller, R., & Stevens, P. A. (2003). The specification of the aggregate production
function in the presence of inefficiency. Economics Letters, 81(2), 223-226.
Kumbhakar, S. C., & Lovell, C. A. K. (2000). Stochastic Frontier Analysis. Cambridge
: University Press Cambridge.
Kumbhakar, S. C., & Wang, H. J. (2005). Estimation of growth convergence using a
stochastic production frontier approach. Economics Letters, 88(3), 300-305.
Kuussaari, H. and Vesala, J. (1995). The efficiency of Finnish banks in producing
payment and account transactions, Working Paper, Bank of Finland.
Koopmans, T. C. (1951). Activity Analysis of Production and Allocation. New York:
Waley
Mas, M., Maudos, J., Pérez, F., & Uriel, E. (1998). Public capital, productive
efficiency and convergence in the Spanish regions (1964–93). Review of Income
and Wealth, 44(3), 383-396.
Margono, H., Sharma, S. C., & Melvin, P. D. (2010). Cost efficiency, economies of scale, technological progress and productivity in Indonesian banks. Journal of
Asian Economics, 21(1), 53–65.
Miller, S. M., & Noulas, A. G. (1996). The technical efficiency of large bank
production. Journal of Banking and Finance, 20(3), 495–509.
Nuryartono, N., Anggraenie, T., & Firdaus, R. S. (2012). Efficiency level of BPR:
Study of stochastic frontier analysis with an approach of time varying decay.
International Research Journal of Finance and Economics, 85(January), 6–13.
Olson, D., & Zoubi, T. (2017). Convergence in bank performance for commercial
and Islamic banks during and after the Global Financial Crisis. Quarterly
Review of Economics and Finance, 65, 71–87.
Patten, R. H., Rosengard, J. K., & Johnston, D. E. (2001). Microfinance success
amidst macroeconomic failure: The experience of bank Rakyat Indonesia
during the East Asian crisis. World Development, 29(6), 1057–1069.
Quah, D. (1996). Empirics for economic growth and convergence. European
Economic Review, 4, 1353–1375.
Ramsey, F. P. (1928). A mathematical theory of saving. The economic journal, 38(152),
543-559.
Sealey, C. W. J., & Lindley, J. T. (1977). Inputs, Outputs, and a Theory of Production
and Cost at Depository Financial Institutions. Journal of Finance, 32(4), 1251–
1266.
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. Source: The
Quarterly Journal of Economics, 70(1), 65–94.
Sun, L., & Chang, T. P. (2011). A comprehensive analysis of the effects of risk
measures on bank efficiency: Evidence from emerging Asian countries. Journal
of Banking and Finance, 35(7), 1727–1735.
Sufian, F., & Habibullah, M. S. (2010). Assessing the impact of financial crisis on
bank performance: Empirical evidence from Indonesia. ASEAN Economic
Bulletin, 245-262.
Weill, L. (2009). Convergence in banking efficiency across European countries.
Journal of International Financial Markets, Institutions and Money, 19(5), 818–833.
Zhang, T., & Matthews, K. (2012). Efficiency convergence properties of Indonesian
banks 1992-2007. Applied Financial Economics, 22(17), 1465–1478.
Published
2018-07-31
How to Cite
Purwono, R., & Yasin, M. (2018). THE CONVERGENCE TEST OF INDONESIA BANKING INEFFICIENCY: DO MACROECONOMIC INDICATORS MATTER?. Buletin Ekonomi Moneter Dan Perbankan, 21(1), 123-137. https://doi.org/10.21098/bemp.v21i1.946
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Copyright (c) 2018 Rudi Purwono, Mohammad Zeqi Yasin
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
