The Efficiency of Indonesian Commercial Banks: Does the Banking Industry Competition Matter?

Abstract

This study examines the effect of banking industry competition on the efficiency of commercial banks in Indonesia from 2010 to 2019. First, using data envelopment analysis (DEA), the results showed that the commercial banks in Indonesia are moderately efficient. Second, this study uses H-statistics, obtained through the Panzar–Rosse model, to measure the level of competition. The results showed that the banking industry competition in Indonesia is a monopolistic market. In addition, this study also analysed other factors affecting bank efficiency, namely non-performing loans (NPL), loan to deposit ratio (LDR), capital adequacy ratio (CAR), bank size, and economic growth. This study used the Tobit estimation method to analyse the effect of competition and other variables. The results showed that tighter competition in the banking industry reduces the commercial banks’ efficiency. The results of this study support the competition-inefficiency hypothesis. Other variables such as CAR, LDR, and economic growth had a significant effect on bank efficiency. Meanwhile, the NPL variable and bank size had no significant effect.

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