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Efficiency and Malmquist Indices of Productivity Change in Indonesian Banking

Author

Listed:
  • Muliaman D. Hadad

    (Bank Indonesia, Jakarta, Indonesia)

  • Maximilian J. B. Hall

    (Dept of Economics, Loughborough University)

  • Wimboh Santoso

    (Bank Indonesia, Jakarta, Indonesia)

  • Ricky Satria

    (Bank Indonesia, Jakarta, Indonesia)

  • Karligash Kenjegalieva

    (Dept of Economics, Loughborough University)

  • Richard Simper

    (Dept of Economics, Loughborough University)

Abstract

In this study we utilise a non-parametric, slacks-based model (SBM) approach to analyse efficiency and productivity changes for Indonesian banks over the period January 2006 to July 2007. Efficiency scores and Malmquist productivity indices are estimated using the approach for efficiency and super-efficiency estimation suggested by Tone (2001, 2002). Additionally, the Malmquist indices are decomposed into technical efficiency change and technological shift components. Using monthly supervisory data provided by Bank Indonesia we find that, under the intermediation approach to efficiency estimation, average bank efficiency was reasonably stable during the sample period, ranging between 70% and 82%, with 92 of the 130 banks in existence at that time having efficiency scores of over 70%, including 10 with (super)efficiency scores above unity. We also find that technical efficiencies under the Intermediation approach to describing the banking production process are relatively stable. Malmquist results for the industry suggest that the main driver of productivity growth is technological progress. A strategy based on the gradual adoption of newer technology, according to our results, thus seems to have the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.

Suggested Citation

  • Muliaman D. Hadad & Maximilian J. B. Hall & Wimboh Santoso & Ricky Satria & Karligash Kenjegalieva & Richard Simper, 2008. "Efficiency and Malmquist Indices of Productivity Change in Indonesian Banking," Discussion Paper Series 2008_08, Department of Economics, Loughborough University, revised Aug 2008.
    • Handle: RePEc:lbo:lbowps:2008_08
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Indonesian Finance and Banking; Productivity; Efficiency.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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