Rural Bank (BPR) was an important part of financial service industry in Indonesia.
Their pivotal role on lending to SMEs in the rural area made their existence very strategic to
rural development. However, due to its operational scale, rural bank charged higher interest
rate than commercial bank. The study estimated the cost efficiency of rural banks using
parametric approach. The result found that rural bank efficiency was very high. The two year
cost efficiency estimated using frontier 4.1 was 95% and median was 100%. The lowest of cost
efficiency level was 32%. It meant cost inefficiency of the banks under investigated was around
10%. The cost efficiency level in 2006 was on average 95% and the median was 100%. It meant
that 50% or more of the observation enjoyed 100% cost efficiency. The minimum was only
67%. It meant they operated at very efficient level, leaving only 5% inefficiency. In 2007, a
dramatic change on efficiency level was going on. The average efficiency was dropped from
11% to 89.9% due to increase on interest rate and price level.
Key words: rural bank, efficiency, cos
