EVALUATION OF BANK MERGER IN INDONESIA: Lessons from Parametric Cost Function

Merger dan akuisisi telah menjadi pilihan utama dalam pelaksanaan konsolidasi perbankan yang direkomendasikan dalam rangka penguatan industri perbankan di Indonesia. Proses merger dan konsolidasi ini membutuhkan biaya besar dan mengandung resiko, dua factor yang menyebabkan penurunan tingkat efisiensi bank yang telah melakukan merger. Penelitian ini menunjukkan bahwa proses merger menurunkan efisiensi bank, meski berdampak positif terhadap stabilitas dari efisiensi bank tersebut. Ini menunjukkan manajemen bank yang lebih baik setelah merger dan peningkatan economies of scale. Sebelum merger, bank harus meningkatkan efisiensi terlebih dahulu, misalnya dengan meningkatkan produktivitas tenaga kerja dan peningkatan utilisasi teknologi. Paper ini menunjukkan, jika skor DFA 0,7, bank dapat meraih keuntungan economies of scale, economies of scope dan technical progress yang dapat meningkatkan efisiensi. Beberapa rekomendasi yang diusulkan, pertama, Bank Indonesia seharusnya mengarahkan manajemen perbankan dalam hal pengalokasian biaya operasional secara optimal. Kedua, harus ada upaya untuk mengembalikan tingkat efisiensi bank pada level efisiensi semula. Ketiga, Bank Indonesia, harus mengarahkan perbankan untuk mengabsorpsi teknologi sejauh mungkin. Keempat, efisiensi internal merupakan aspek penting yang harus diraih sebelum proses merger dilakukan. JEL: C29, C39, D23, G21 Keywords : X-efficiency, Merger, Seemingly Unrelated Regression, Cost function, Economies of scale, Bank

A New Approach to Dealing With Negative Numbers in Efficiency Analysis: An Application to the Indonesian Banking Sector

In one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during the period 2003-2007. Using a new approach (i.e., semi-oriented radial measure Data Envelopment Analysis, or ‘SORM DEA’) to handling negative numbers (Emrouznejad et al., 2010) and combining it with Tone’s (2001) slacks-based model (SBM) to form an input-oriented, non-parametric SORM SBM model, we firstly estimate the relative average efficiencies of Indonesian banks, both overall, by group, as determined by their ownership structure, and by status (‘listed’/’Islamic’). For robustness, a range-directional (RD) model suggested by Silva Portela et al. (2004) was also employed to handle the negative numbers. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to formally test for the impact of size, ownership structure and status on Indonesian bank efficiency. In addition, we formally test the two models most widely suggested in the literature for controlling for bank risk – namely, those involving the inclusion of provisions for loan losses and equity capital respectively as inputs – to check the robustness of the results to the choice of risk variable. The results demonstrate a high degree of sensitivity of the average bank efficiency scores to the choice of methodology for handling negative numbers – with the RD model consistently delivering efficiency scores some 14% on average above those from the SORM SBM model – and to the choice of risk control variable under the RD model, but only a limited sensitivity to the choice of risk control variable under the SORM SBM model. With respect to group rankings, most model combinations find the ‘state-owned’ group to be the most efficient, with average overall efficiency levels ranging between 64% and 97%; while all model combinations find the ‘regional government-owned’ group to be the least efficient, with average overall efficiency levels ranging between 41% and 64%. As for the impact of bank ‘status’ on the efficiency scores, both the Islamic banks and the listed banks perform better than the industry average in the majority of model combinations. Finally, the results for the impact of scale on the efficiency scores are ambiguous. Under the RD model, and irrespective of the choice of risk control variable, size is very important in determining intermediation-based efficiency. Under the SORM SBM model, however, large banks’ performance is not significantly different from that of the medium-sized banks when equity capital is used as the risk control variable, although the medium-sized banks do out-perform small banks. Moreover, when loan loss provisions are used as the risk control variable, medium-sized banks are shown to significantly out-perform both large and small banks, with the large banks being the least efficient.Indonesian Finance and Banking; Efficiency.

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.Indonesian Finance and Banking; Productivity; Efficiency.

Efficiency in Indonesian Banking: Recent Evidence

In one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during 2007. Using Tone’s (2001) input-oriented, non-parametric, slacks-based DEA model, and modifying it where necessary to deal with negative inputs and outputs (Sharp et al. 2006), we firstly estimate the relative average efficiencies of Indonesian banks, both overall, and by group, as determined by their total asset size and status. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to eliminate the ‘bias’ in the efficiency estimates and to formally test for the impact of size and status on Indonesian bank efficiency. The results from the initial analysis show that: (i) average bank efficiency within the industry during 2007 lay between 62% – 67%; (ii) the most efficient group of banks was the ‘state-owned’ group with an average efficiency score of over 90%, with the least efficient group being the ‘regional government-owned’ banks with average efficiency scores between 45% and 58%; (iii) ‘listed banks’ performed better, on average, than ‘non-listed banks’; and (iv) ‘Islamic banks’, despite their different operational structure when compared with conventional banks, enjoyed average efficiency scores between 54% and 74%. In the second stage of the analysis, the bias-corrected efficiency scores demonstrate that ‘regional government-owned’, ‘foreign exchange’, ‘non-foreign exchange’, ‘joint-venture’ and ‘foreign’ groupings were significantly less efficient than ‘state-owned’ banks, with the first-mentioned being the most inefficient and the other groupings ranked in ascending order of efficiency, as listed. Moreover, large banks were shown to be more efficient than their smaller counterparts, providing support for Bank Indonesia’s consolidation policies.Indonesian Finance and Banking; Efficiency.

Rancangan Kebijakan Budaya Organisasi untuk Peningkatan Kapabilitas Bank Sentral

The aim of this study is to develop policies of organization culture (OC). The policies analysis cover management process and its changing in Bank Indonesia, including direction and substance of OC, developing ideal models, methods, dynamic change and its management. Awareness about the importance of OC in improving the performance of the organization had been recognized by management of Bank Indonesia in the surface, but when examined the dynamics of the changes, the implementation seem fluctuated. Using a system approach, this research employ three main tools: Analytical Network Process (ANP), Strategic Assumption Surfacing and Testing (SAST), and Interpretative Structural Modeling (ISM). The knowledge base data are compiled using combination of several methods: survey, focus group discussion (FGD), statistics of secondary data, and structured in depth interviews. This research has found the new values which should be adopted for BI are integrity professional, visionary, competence, and transparent. Besides, it also delevelop models to implement a new organization culture management. In terms of organization culture change program, this research uncovers several important phenomena such as: the central role of the board of governor, the function of performance management and assessment, and the role of director in every unit

RANCANGAN KEBIJAKAN BUDAYA ORGANISASI UNTUK PENINGKATAN KAPABILITAS BANK SENTRAL

The aim of this study is to develop policies of organization culture (OC). The policies analysis cover management process and its changing in Bank Indonesia, including direction and substance of OC, developing ideal models, methods, dynamic change and its management.  Awareness about the importance of OC in improving the performance of the organization had been recognized by management of Bank Indonesia in the surface, but when examined the dynamics of the changes, the implementation seem fluctuated. Using a system approach, this research employ three main tools: Analytical Network Process (ANP), Strategic Assumption Surfacing and Testing (SAST), and Interpretative Structural Modeling (ISM). The knowledge base data are compiled using combination of several methods: survey, focus group discussion (FGD), statistics of secondary data, and structured in depth interviews. This research has found the new values which should be adopted for BI are integrity professional, visionary, competence, and transparent. Besides, it also delevelop models to implement a new organization culture management. In terms of organization culture change program, this research uncovers several important phenomena such as: the central role of the board of governor, the function of performance management and assessment, and the role of director in every unit.Keywords : organization Culture, Values,Sub-culture Type, Analytical Network Process, Strategic Assumption Surfacing and Testing, Interpretative Structural Modelin

Efficiency and Malmquist Indices of Productivity Change in Indonesian Banking

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.Indonesian Finance and Banking; Productivity; Efficiency.

Banking Efficiency and Stock Market Performance: An Analysis of Listed Indonesian Banks

This paper examines the monthly efficiency and productivity of listed Indonesian banks and their market performance through the prism of two modelling techniques, efficiency and super-efficiency, over the period January 2006 to July 2007. Within this research strategy we employ Tone’s (2001) non-parametric, Slacks-Based Model (SBM) and Tone’s (2002) super-efficiency SBM combining them with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007). In the case of the SBM efficiency scores, the Simar and Wilson methodology was adapted to two truncations, whereas in the super-efficiency framework the original technique was utilised. As suggested by neo-classical theory, we find that the stock market values banks in accordance with their performance. Moreover, it is found that the JCI index of the Indonesian Stock Exchange is positively related to bank efficiency. Another interesting finding is that the coefficient for the share of foreign ownership is negative and statistically significant in the super-efficiency modelling. This suggests that Indonesian banks with foreign ownership tend to be less efficient than their domestic counterparts. Finally, Malmquist productivity results suggest that, over the study’s horizon, the sample banks displayed volatile productivity patterns in their profit-generating operations.Indonesian Banking, Emerging Markets, Productivity, Efficiency.

Productivity changes in Indonesian banking: application of a new approach to estimating 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 DEA) approach for dealing with negative data (Emrouznejad et al., 2010) with the slacks-based efficiency measure of Tone (2001, 2002), to analyse efficiency and productivity changes for Indonesian banks over the period Quarter I 2003 to Quarter IV 2007. Using quarterly data based on supervisory data provided by Bank Indonesia we find that, under the intermediation-based approach to efficiency estimation, average Indonesian bank efficiency somewhat declined during the sample period, from 73% to 63%, reaching a nadir of 53% at end-June 2007. With respect to the bank groupings, Indonesian ‘state-owned’ banks were the most efficient at the beginning of the sample period (with average efficiency of 92%) but, by the end of the sample period, they had been usurped by the ‘joint-venture’ and ‘non-foreign exchange private’ banks. The regional government-owned banks were found to be the least efficient throughout. Finally, Malmquist results for the Indonesian banking 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

A new approach to dealing with negative numbers in efficiency analysis: an application to the Indonesian banking sector

In one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during the period 2003-2007. Using a new approach (i.e., semi-oriented radial measure Data Envelopment Analysis, or ‘SORM DEA’) to handling negative numbers (Emrouznejad et al., 2010) and combining it with Tone’s (2001) slacks-based model (SBM) to form an input-oriented, non-parametric SORM SBM model, we firstly estimate the relative average efficiencies of Indonesian banks, both overall, by group, as determined by their ownership structure, and by status (‘listed’/’Islamic’). For robustness, a range-directional (RD) model suggested by Silva Portela et al. (2004) was also employed to handle the negative numbers. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to formally test for the impact of size, ownership structure and status on Indonesian bank efficiency. In addition, we formally test the two models most widely suggested in the literature for controlling for bank risk – namely, those involving the inclusion of provisions for loan losses and equity capital respectively as inputs – to check the robustness of the results to the choice of risk variable. The results demonstrate a high degree of sensitivity of the average bank efficiency scores to the choice of methodology for handling negative numbers – with the RD model consistently delivering efficiency scores some 14% on average above those from the SORM SBM model – and to the choice of risk control variable under the RD model, but only a limited sensitivity to the choice of risk control variable under the SORM SBM model. With respect to group rankings, most model combinations find the ‘state-owned’ group to be the most efficient, with average overall efficiency levels ranging between 64% and 97%; while all model combinations find the ‘regional government-owned’ group to be the least efficient, with average overall efficiency levels ranging between 41% and 64%. As for the impact of bank ‘status’ on the efficiency scores, both the Islamic banks and the listed banks perform better than the industry average in the majority of model combinations. Finally, the results for the impact of scale on the efficiency scores are ambiguous. Under the RD model, and irrespective of the choice of risk control variable, size is very important in determining intermediation-based efficiency. Under the SORM SBM model, however, large banks’ performance is not significantly different from that of the medium-sized banks when equity capital is used as the risk control variable, although the medium-sized banks do out-perform small banks. Moreover, when loan loss provisions are used as the risk control variable, medium-sized banks are shown to significantly out-perform both large and small banks, with the large banks being the least efficient