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

Author

Listed:
  • Sajida Sari

    (Department of Economics, Faculty Economics and Business, Airlangga University, Surabaya 60286, Jawa Timur, Indonesia)

  • Shochrul Rohmatul Ajija

    (Department of Economics, Faculty Economics and Business, Airlangga University, Surabaya 60286, Jawa Timur, Indonesia)

  • Wasiaturrahma Wasiaturrahma

    (Department of Economics, Faculty Economics and Business, Airlangga University, Surabaya 60286, Jawa Timur, Indonesia)

  • Raja Adzrin Raja Ahmad

    (Faculty of Accountancy, Universiti Teknologi MARA, Segamat 85000, Johor, Malaysia)

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.

Suggested Citation

  • Sajida Sari & Shochrul Rohmatul Ajija & Wasiaturrahma Wasiaturrahma & Raja Adzrin Raja Ahmad, 2022. "The Efficiency of Indonesian Commercial Banks: Does the Banking Industry Competition Matter?," Sustainability, MDPI, vol. 14(17), pages 1-16, September.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:17:p:10995-:d:905462
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    References listed on IDEAS

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