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Productivity Changes and Risk Management in Indonesian Banking: An Application of a New Approach to Constructing Malmquist Indices

  • Muliaman D. Hadad

    (Bank Indonesia, Jakarta, Indonesia)

  • Maximilian J. B. Hall

    ()

    (Dept of Economics, Loughborough University)

  • Wimboh Santoso

    (Bank Indonesia, Jakarta, Indonesia)

  • Karligash Kenjegalieva

    ()

    (Dept of Economics, Loughborough University)

  • Richard Simper

    ()

    (Dept of Economics, Loughborough University)

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.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Malmquist_Jan2010.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2010_04.

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Date of creation: Feb 2010
Date of revision: Feb 2010
Handle: RePEc:lbo:lbowps:2010_04
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  1. 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).
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