Indonesian Islamic Commercial Banks’ Efficiency: A Stochastic Frontier Analysis
Islamic banks in Indonesia are continuously experiencing a rapid growth; thus, it results in a competitive financial sector. Consequently, maintaining an excellent performance is a prerequisite to gain customers’ trust and loyalty, one of the ways is enhancing productivity and efficiency performance. Drawing on this issue, the present study aims to examine the efficiency of Islamic banks listed in the Financial Services Authority (OJK) in the period of 2015 to 2019. Employing Stochastic Frontier Analysis (SFA) as a parametric approach, this study measured the efficiency level of cost and profit efficiency of the Indonesian Islamic commercial banks. The data were a cross-section and panel data obtained from financial reports established by seven Indonesian Islamic commercial banks. The result of frontier analysis on the efficiency costs showed that the value of sharia banks’ average efficiency in Indonesia was approximately 93.41%, while the efficiency of profit resulted in 55.35%. These results suggest that Islamic banks tend to be efficient in controlling costs from the year of 2015 to 2019. It is a worth saying that this study’s results contribute to providing fruitful insights for Islamic banks to increase their efficiency by controlling their cost of production such as the cost of funds and cost of operation.
Keywords : Financial Costs; Financial Profits; Islamic Banks Efficiency; Stochastic Frontier Analysis
- Aigner, D., Lovell, C. A. K., & Schmidt, P. (1977). Formulation and estimation of stochastic frontier production function models. Journal of Econometrics, 6(1), 21–37. https://doi.org/https://doi.org/10.1016/0304-4076(77)90052-5
- Aldeen, K. N., Herianingrum, S., & Al Agawany, Z. M. W. (2020). Islamic vs. Conventional Banks in Syria: Analysis of Financial Performances. Shirkah: Journal of Economics and Business, 5(1), 1–26.
- Andor, M., & Parmeter, C. (2017). Pseudolikelihood estimation of the stochastic frontier model. In T. K. Bauer, W. Leininger, V. Clausen, R. Döhrn, M. Frondel, & J. Kluve (Eds.), Applied Economics 49(55). Ruhr-Universität Bochum (RUB), Department of Economics Universitätsstr. 150, 44801 Bochum, Germany. https://doi.org/http://dx.doi.org/10.4419/86788804
- Andri, Suryanto, T., Ghofur, R. A., & Anggraeni, E. (2020). Analysis of Sharia Innovation Strategic and Efficiency towards Sustainable Ability Shariah Mandiri Banks in Lampung. JEBIS Jurnal Ekonomi Dan Bisnis Islam, 6(1), 20–41. https://doi.org/10.20473/jebis.v6i1.18712
- Anwar, M. (2019). Cost efficiency performance of Indonesian banks over the recovery period: A stochastic frontier analysis. The Social Science Journal, 56(3), 377–389. https://doi.org/https://doi.org/10.1016/j.soscij.2018.08.002
- Ascarya & Yumanita, D. (2006). Analisis efisiensi perbankan syariah di Indonesia dengan Data Envelopment Analysis. TAZKIA Islamic Finance and Business Review, 1(2), 1-32. https://doi.org/https://doi.org/10.1017/CBO9781107415324.004
- Berger, A. N., & Hannan, T. H. (1998). The efficiency cost of market power in the banking industry: A test of the “quiet life” and related hypotheses. Review of Economics and Statistics, 80(3), 454–465.
- Chang, M., Jang, H. B., Li, Y. M., & Kim, D. (2017). The relationship between the efficiency, service quality and customer satisfaction for state-owned commercial Banks in China. Sustainability (Switzerland), 9(12), 2163. https://doi.org/10.3390/su9122163
- Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2, 429–444.
- Hadad, M. D., Hall, M. J., 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. https://doi.org/10.1007/s11156-010-0192-1
- Hardianto, D. S., & Wulandari, P. (2016). Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency. International Journal of Islamic and Middle Eastern Finance and Management., 9(2), 296–311. https://doi.org/10.1108/IMEFM-01-2015-0003
- Hendrawan, R., & Nasution, A. A. (2018). Assessing Banking Profit Efficiency Using Stochastic Frontier Analysis. Journal of Finance and Banking Review, 3(4), 67–76.
- Hosen, M. N., & Rahmawati, R. (2016). Efficiency and Profitability in The Indonesian Islamic Banking Industry. 8(1), 33-48. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 8(1), 33–48. https://doi.org/10.15408/aiq.v8i1.2507
- Imam, P., & Kpodar, K. (2013). Islamic banking: how has it expanded? Emerging Markets Finance and Trade, 49(6), 112–137. https://doi.org/10.2753/REE1540-496X490607
- Kallel, H., Hamad, S. B., & Triki, M. (2019). Modeling the efficiency of Tunisian and Moroccan banks using the SFA approach. International Journal of Productivity and Performance Management, 68(5), 879–902. https://doi.org/10.1108/IJPPM-03-2018-0099
- Karray, S. C., & Jamel, eddine C. (2013). Bank size and efficiency in developing countries: intermediation approach versus value added approach and impact of non-traditional activities. Asian Economic and Financial Review, 3(5), 593.
- Kumbhakar, S., Peresetsky, A., Shchetynin, Y., & Zaytsev, A. (2019). Technical efficiency and inefficiency: SFA misspecification. ArXiv Preprint ArXiv:1902.02824.
- Kusmayadi, D., Badruzaman, J., & Firmansyah, I. (2017). Efficiency and profitability of Islamic banks in Indonesia. Advanced Science Letters, 23(9), 8807–8812. https://doi.org/10.1166/asl.2017.9975
- Maulana, M. R., & Rusmita, S. A. (2019). Bank Fundamentals and Equity Financing in Indonesia. International Journal of Innovation, Creativity and Change, 9(8), 197-216.
- Mohamad, S., Hassan, T., & Bader, M. K. I. (2008). Efficiency of conventional versus Islamic Banks: international evidence using the Stochastic Frontier Approach (SFA). Journal of Islamic Economics, Banking and Finance, 4(2), 107–130.
- Mokhtar, H. S. A., Abdullah, N., & Al-Habshi, S. M. (2006). Efficiency of Islamic Banking in Malaysia. Journal of Economic Cooperation 27, 2, 37–70. http://kantakji.com/media/7403/b300.pdf
- Nguyen, P. H., & Pham, D. T. B. (2020). The cost efficiency of Vietnamese banks–the difference between DEA and SFA. Journal of Economics and Development, 22(2), 209–227. https://doi.org/10.1108/JED-12-2019-0075
- Nugroho, L., Badawi, A., & Hidayah, N. (2019). Indonesia Islamic Bank Profitability 2010-2017. Shirkah: Journal of Economics and Business, 4(1), 75–97.
- Rahmawati, R. (2015). Strategi peningkatan efisiensi biaya pada bank umum syariah berbasis stochastic frontier approach dan data envelopment analysis. Buletin Ekonomi Moneter Dan Perbankan, 17(4), 457–480. https://doi.org/10.21098/bemp.v17i4.506
- Saeed, M. B., & Saeed, S. K. (2018). Characteristics of Sharı ‘ah Supervisory Board, Corporate Governance Mechanisms and Efficiency of Islamic Banks: Evidence from Listed Banks in Asia. Journal of Islamic Business and Management, 8(1), 116–138. https://doi.org/10.26501/jibm/2018.0801-008
- Sakouvogui, K., & Shaik, S. (2020). Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system. Studies in Economics and Finance, 37(2), 391–410. https://doi.org/10.1108/SEF-04-2019-0155
- Silva, T. C., Tabak, B. M., Cajueiro, D. O., & Dias, M. V. B. (2017). A comparison of DEA and SFA using micro-and macro-level perspectives: Efficiency of Chinese local banks. Physica: A Statistical Mechanics and Its Applications, 469, 216–223. https://doi.org/10.1016/j.physa.2016.11.041
- Srairi, S. A. (2010). Cost and profit efficiency of conventional and Islamic banks in GCC countries. Journal of Productivity Analysis, 34(1), 45–62. https://doi.org/10.1007/s11123-009-0161-7
- Tahir, Z. M., & Haron, S. (2010). Cost and profit efficiency of Islamic banks: international evidence using the stochastic frontier approach. Banks and Bank Systems, 5(4), 78–83.
- Wanke, P., Tsionas, M. G., Chen, Z., & Antunes, J. J. M. (2020). Dynamic network DEA and SFA models for accounting and financial indicators with an analysis of super-efficiency in stochastic frontiers: An efficiency comparison in OECD banking. International Review of Economics & Finance, 69, 456-468. https://doi.org/10.1016/j.iref.2020.06.002
- Zuhroh, I., Ismail, M., & Maskie, G. (2015). Cost Efficiency of Islamic Banks in Indonesia–A Stochastic Frontier Analysis. Procedia-Social and Behavioral Sciences, 21(1), 1122–1131. https://doi.org/10.1016/j.sbspro.2015.11.150