Bank Efficiency and Productivity Growth in Indonesia during Restructuring period

Abstract

More than a decade after the severe economic crisis in 1997, Indonesia has undergone major changes in the banking industry. The restructuring program is continuing up to the present to strengthen and improve the performance of the banking system. This paper examines and analyses the efficiency and productivity change in the Indonesian banking industry during the restructuring period, encompassing the 12 years from 2000 to 2011. Employing nonparametric data envelopment analysis (DEA) and a Malmquist productivity index (MPI), this study provides measures of technical efficiency, efficiency change and technological change using panel data from 108 commercial banks. The finding suggests that in general the structural reforms have improved the average level of bank efficiency and productivity in which efficiency change is the main source of productivity improvements rather than technological change. It also reveals that the efficiency score under variable returns to scale is higher than under constant return to scale. Furthermore, the improvement of scale efficiency change indicates the positive effect of the structural reforms through mergers and acquisitions.