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Technical Efficiency Levels of Rural Banks (BPRs) in West Java: A Stochastic Frontier Approach

Author

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  • Putu Geniki Lavinia Natih

    (Trinity College, Oxford University)

Abstract

There is considerable evidence from around the world to support the idea that access to formal financial services is a key factor towards achieving poverty alleviation. The government of Indonesia has placed high importance on the issue of improved access to financial services and one feels that it would be appropriate to begin the process of analyzing effective financial inclusion initiatives with the existing Bank Perkreditan Rakyat (BPR) system. BPRs have long been an integral part of Indonesia’s financial, economic, and social development. This research is focused on BPRs in West Java. In this research, the writer evaluates BPR performance within twenty-five districts in West Java, by measuring the technical efficiency levels of the BPRs through employing the Stochastic Frontier Approach (SFA). The district that has the highest BPR average inefficiency score is Bandung city and the district with the lowest average BPR inefficiency score is the district of Ciamis. Increases in bank concentration (indicated by the Hirschman-Herfindahl Index) and income per capita are shown to decrease BPR inefficiency levels. Increases in the percentage of the population under the poverty line, the percentage of the labor force with a high school education, the percentage of road length per area, and the amount of bank offices per district, increase the inefficiency levels of BPRs. Overall, it is found that BPRs cannot operate efficiently in areas which are too underdeveloped; neither can they operate efficiently in areas which are too well developed.

Suggested Citation

  • Putu Geniki Lavinia Natih, 2015. "Technical Efficiency Levels of Rural Banks (BPRs) in West Java: A Stochastic Frontier Approach," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 61, pages 223-240, December.
    • Handle: RePEc:lpe:efijnl:201513
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D - Microeconomics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • G - Financial Economics
    • G2 - Financial Economics - - Financial Institutions and Services

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