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Decomposing bank net interest margin: A dynamic stochastic frontier and dominance analysis

Author

Listed:
  • Moch. Doddy Ariefianto

    (Accounting Department, School of Accounting-Master Accounting Bina Nusantara University)

  • Triasesiarta Nur

    (Accounting Department, School of Accounting-Master Accounting Bina Nusantara University)

Abstract

This study aims to disentangle and quantify the time-varying inefficiency component of the Net Interest Margin (NIM), separating it from other contributors such as core factors, control factors, and bank-specific heterogeneity. To achieve this, a two-step empirical design was employed, combining a dynamic stochastic frontier model with dominance analysis. The procedure was replicated across various subsamples—based on ownership structure, bank scale, and the COVID-19 period—as robustness checks. The results show that time-varying inefficiency plays the most significant role in explaining NIM, accounting for approximately 47.1%, while core factors contribute around 31.2%. Only modest variations were found across subsamples. This study offers an innovative methodological approach and concrete findings on one of the most critical banking metrics, with meaningful policy implications.

Suggested Citation

  • Moch. Doddy Ariefianto & Triasesiarta Nur, 2025. "Decomposing bank net interest margin: A dynamic stochastic frontier and dominance analysis," Economics Bulletin, AccessEcon, vol. 45(3), pages 1554-1565.
    • Handle: RePEc:ebl:ecbull:eb-25-00338
    as

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    References listed on IDEAS

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    4. Agnese, Paolo & Cerciello, Massimiliano & Oriani, Raffaele & Taddeo, Simone, 2024. "ESG controversies and profitability in the European banking sector," Finance Research Letters, Elsevier, vol. 61(C).
    5. Ferdian Timur Satyagraha & Rudi Purwono & Dyah Wulan Sari, 2022. "An Analysis of the Performance of Regional Development Banks (RDB) in Indonesia: Stochastic Frontier Analysis Approach," Economies, MDPI, vol. 10(9), pages 1-12, September.
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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