Factor Determining the Productivity of Indonesian Banks during Restructuring Period

Abstract

This study aims to analyse the source of productivity growth and its determinants in the Indonesian banking sector during the restructuring period. The period of restructuring following the 1997 Asian financial crisis played an important role in transforming the industry towards a more resilient banking system. The Malmquist Productivity Index (MPI) is employed to measure the total factor productivity of the bank in the first stage, then followed by multiple regression analysis is used to explore factors that affect the variation in productivity. The analysis is conducted based on annual financial data of 101 commercial banks in Indonesia. The results show that technological change tends to be the main source of productivity improvement rather than efficiency change. At the second stage of analysis, regression result suggest that productivity growth is mainly influenced by broad money, market concentration and foreign ownership. There is no strong evidence that merger affect productivity growth significantly.