Productivity Changes and Risk Management in Indonesian Banking: An Application of a New Approach to Constructing Malmquist Indices
In this study, we utilise a new, non-parametric efficiency measurement approach which combines the semi-oriented radial measure data envelopment analysis (SORM-SBM-DEA) approach for dealing with negative data (Emrouznejad et al., 2010) with the slacks-based efficiency measures of Tone (2001, 2002) to analyse productivity changes for Indonesian banks over the period Quarter I 2003 to Quarter II 2007. Having constructed the Malmquist indices, using data provided by Bank Indonesia (the Indonesian central bank), for the banking industry and different bank types (i.e., listed and Islamic) and groupings, we then decomposed the industry’s Malmquist into its technical efficiency change and frontier shift components. Finally, we analysed the banks’ risk management performance, using Simar and Wilson’s (2007) truncated regression approach, before assessing its impact on productivity growth. The first part of the Malmquist analysis showed that average productivity changes for the Indonesian banking industry tended to be driven, over the sample period, by technological progress rather than by frontier shift, although a relatively stable pattern was exhibited for most of the period. However, at the beginning of the considered period, state-owned and foreign banks, as well as Islamic banks, exhibited volatile productivity movements, mainly caused by shifts in the technological frontier. With respect to the risk management analysis, most of the balance sheet variables were shown to have had the expected impact on risk management efficiency. While the risk management decomposition of technical efficiency change and frontier risk components demonstrated that, by the end of the sample period, the change in risk management efficiency and risk management effects had the same dynamic pattern, resulting in the analogous dynamics for technical efficiency changes. Therefore, a strategy based on the gradual adoption of newer technology, with a particular focus on internal risk management enhancement, seems to offer the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.
|Date of creation:||Feb 2010|
|Date of revision:||Feb 2010|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 1509 222701
Fax: +44 (0) 1509 223910
Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fukuyama, Hirofumi & Weber, William L., 2002. "Estimating output allocative efficiency and productivity change: Application to Japanese banks," European Journal of Operational Research, Elsevier, vol. 137(1), pages 177-190, February.
- International Monetary Fund, 2007. "Indonesia; Selected Issues," IMF Staff Country Reports 07/273, International Monetary Fund.
- Emrouznejad, Ali & Anouze, Abdel Latef & Thanassoulis, Emmanuel, 2010. "A semi-oriented radial measure for measuring the efficiency of decision making units with negative data, using DEA," European Journal of Operational Research, Elsevier, vol. 200(1), pages 297-304, January.
- Scheel, Holger, 2001. "Undesirable outputs in efficiency valuations," European Journal of Operational Research, Elsevier, vol. 132(2), pages 400-410, July.
- Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-66, September.
- Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
- Liu, Fuh-Hwa Franklin & Wang, Peng-hsiang, 2008. "DEA Malmquist productivity measure: Taiwanese semiconductor companies," International Journal of Production Economics, Elsevier, vol. 112(1), pages 367-379, March.
- José Manuel Pastor Monsálvez, 1998. "- Efficiency And Risk Management In Banking Firms: A Method To Decompose Risk," Working Papers. Serie EC 1998-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
- Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
- Kenjegalieva, Karligash & Simper, Richard & Weyman-Jones, Tom & Zelenyuk, Valentin, 2009. "Comparative analysis of banking production frameworks in eastern european financial markets," European Journal of Operational Research, Elsevier, vol. 198(1), pages 326-340, October.
- Luc Laeven & Giovanni Majnoni, 2002.
"Loan loss provisioning and economic slowdowns: too much too late?,"
Conference Series ; [Proceedings],
Federal Reserve Bank of Boston.
- Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
- Laeven, Luc & Majnoni, Giovanni, 2001. "Loan loss provisioning and economic slowdowns : too much, too late?," Policy Research Working Paper Series 2749, The World Bank.
- Tone, Kaoru, 2001. "A slacks-based measure of efficiency in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 130(3), pages 498-509, May.
- Tone, Kaoru, 2002. "A slacks-based measure of super-efficiency in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 143(1), pages 32-41, November.
- Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer, vol. 30(3), pages 237-263, December.
- Jose Pastor, 1999. "Efficiency and risk management in Spanish banking: a method to decompose risk," Applied Financial Economics, Taylor & Francis Journals, vol. 9(4), pages 371-384.
- Williams, Jonathan & Nguyen, Nghia, 2005. "Financial liberalisation, crisis, and restructuring: A comparative study of bank performance and bank governance in South East Asia," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2119-2154, August.
- José Manuel Pastor Monsálvez, 1999.
"- Credit Risk And Efficiency In The European Banking Systems: A Three-Stage Analysis,"
Working Papers. Serie EC
1999-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Jose Pastor, 2002. "Credit risk and efficiency in the European banking system: A three-stage analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 12(12), pages 895-911.
When requesting a correction, please mention this item's handle: RePEc:lbo:lbowps:2010_04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Huw Edwards)
If references are entirely missing, you can add them using this form.