FINANCIAL AND SOCIAL EFFICIENCY ON INDONESIAN ISLAMIC BANKS: A NON-PARAMETRIC APPROACH

  • Aam Slamet Rusydiana Sharia Economic Applied Research & Training (SMART), Indonesia
  • Lina Marlina Tasikmalaya University, Indonesia
Keywords: Financial Efficiency, Social Efficiency, DEA, FDH, Islamic Bank

Abstract

This paper explores financial and social efficiency in one assessment framework. In order to measure efficiency level of Islamic Banking Industry, this study uses Data Envelopment Analysis (DEA) and Free Disposal Hull (FDH) methods. The results show that the level of financial efficiency of Islamic banks in Indonesia from 2013 to 2018 tends to decrease. On the contrary, the level of social efficiency of Islamic banks in Indonesia has a tendency to increase. Furthermore, the value of social efficiency of Islamic banks in Indonesia was relatively lower compared to the value of financial efficiency. Within the Financial-Social Efficiency Quadrant framework, the study classified two Islamic banks in quadrant 1, three in quadrant 2, two in quadrant 3, and four in quadrant 4. It is imperative for Islamic banks that are in the low level of ‘social efficiency’ to develop a policy to keep in line with the five factors of maqashid sharia apart of maintaining efficiency in order to reach maslahah. For the regulators, the social efficiency measurement framework could be an alternative in considering Islamic bank performance beyond financial efficiency.

References

Abbasi, M., Jahanshahloo, G.R., Malkhalifeh, M.R., and Lotfi, F.H. (2014). Estimation of congestion in free disposal hull models using data envelopment analysis. The Scientific World Journal, 2014, 1-9.

Abdul-Majid, M., Saal, D.S., and Battisti, G. (2011). The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Applied Economics, 43(16), 2033-2054.

Ajija, S.R., Yasin, M.Z., and Albra, R. (2017). Indonesian banking efficiency: Transmission to the financial stability confronting ASEAN economic community. Jurnal Ekonomi Pembangunan, 18(2), 183-193.

Akhter, W., Raza, A., Akram, M. (2011). Efficiency and performance of Islamic Banking: The case of Pakistan. Far East Journal of Psychology and Business, 2(2), 54-71.

Al-Arif, M.N.R., Mufraini, M.A., Prabowo, M.A. (2019). Market structure, spin-off and efficiency: Evidence from Indonesian Islamic banking industry. Emerging Market Finance & Trade, 2019, 1-9.

Ali, A., Hui, L., and Ali, A. (2016). Efficiency and performance of Islamic banking in Pakistan: A stochastic frontier analysis. International Journal of Economics, Finance and Management, 5(2), 42-48.

Al-Jarrah, I., & Molyneux, P. (2003). Cost efficiency, scale elasticity and scale economies in Arabian banking. Financial Development in Arab Countries, 25.

Amin, G.R., and Shirvani, M.S.H. (2009). Evaluation of scheduling solutions in parallel processing using DEA FDH model. Journal of Industrial Engineering International, 5(9), 58-62.

Anwar, Mokhamad. (2016). The efficiency of banks in Indonesia: Sharia vs conventional banks. Bulletin of Monetary, Economics and Banking, 18(3), 307-332.

Aragon, Y., Daouia, A., and Thomas-Agnan, C. (2006). Efficiency measurement: A nonparametric approach. Annales d’Economie et Statistique, 82, 217-242.

Ascarya, Yumanita, D., Achsani, N.A., and Rokhimah, G.S. (2008). Comparing the efficiency of conventional and Islamic banks in Indonesia using parametric and nonparametric approaches. Paper presented at University of Melbourne International Symposium and Conference on Islamic Banking and Finance: Ethics and Financial Practice in Global Perspective, Australia, November 19-20, 2008.

Ascarya & Yumanita, D. (2008). Comparing the Efficiency of Islamic Banks in Malaysia and Indonesia. Bulletin of Monetary, Economic and Banking, 11(2), 95-119.

Ascarya & Yumanita, D. (2007). Comparing the Efficiency of Islamic Banks in Malaysia and Indonesia. Paper presented at IIUM International Conference on Islamic Banking and Finance (IICiBF): Research and Developement between Ideals and Realities. IIUM – Kuala Lumpur, 23-25 April.

Ascarya and Yumanita, D. (2007b). Analisis Efisiensi Perbankan Syariah di Indonesia dengan Data Envelopment Analysis. Tazkia Islamic Finance and Business Review, 1(2), 1-32.

Bader, M. K. I., Mohamad, S., Ariff, M., & Hassan, T. (2007). Cost Revenue, and Profit Efficiency of Conventional versus Islamic Banks: Financial Ratios Approach. Review of Islamic Economics, 11, 89-106.

Bardhan, I., Bowlin, W.F., Cooper, W.W., and Sueyoshi, T. (1996). Models and measures for efficiency dominance in DEA: Part II: Free Disposal Hull (FDH) and Russel Measure (RM) approach. Journal of the Operations Research Society of Japan, 39, 333-344.

Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal Operational Research, 98, 175–212.

Berger, A. N., Hancock, D., & Humphrey, D. B. (1993). Bank efficiency derived from the profit function. Journal of Banking and Finance, 17, 317-347.

Charnes, A., Cooper, W.W., and Rhodes, E. (1978). Measuring the Efficiency of Decision Making Units. European Journal of Operation Research, 2(6), 429-440.

Cherchye, L., Kuosmanen, T., and Post, T. (2000). What is the economic meaning of FDH? A reply to Thrall. Journal of Productivity Analysis, 13, 263-267.

Cherchye, L., Kuosmanen, T., and Post, T. (2001). FDH directional distance functions with an application to European commercial banks. The Journal of Productivity Analysis, 15(3), 201-215.

Coelli.T.I, Rao, D.S.P. and Battese, G.E. (1998). Introduction to Efficiency and Productivity Analysis. Kluwer Academic Publisher, Boston.

Coelli, T.J, Rao, D.S.P., Prasada Rao, Christoper J. O’Donnel and G.E. Battese. (2005). Introduction to Efficiency and Productivity Analysis, (Second Edition). Kluwer Academic Publishers, Boston.

Cooper, William W., Seiford, Lawrence M., and Tone, Koru. (1999). A Comprehensive Text with Models, Application, References and DEA-Solver Software. Kluwer Academic Publisher, Boston USA.

Cooper, et al. (2002). Data Envelopment Analysis. Kluwer Academic Publisher, USA.

Cooper, William W, Lawrance M. Seiford and Joe Zhu. (2010). Handbook on Data Envelopment Analysis. London: Springer.

De Borger, B., and Kerstens, K. (1996). Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA and econometric approach. Regional Science and Urban Economics, 26, 145-170.

De Borger, B., and Kerstens, K. (1996). Radial and nonradial measures of technical efficiency: An empirical illustration for Belgian local governments using an FDH reference technology. Journal of Productivity Analysis, 7, 41-62.

De Borger, B., Ferrier, G.D., and Kerstens, K. (1998). The choice of a technical efficiency measure on the Free disposal hull reference technology: A comparison using US banking data. European Journal of Operational Research, 105(3), 427-

Defung, F., Salim, R., and Bloch, H. (2016). Has regulatory reform had any impact on bank efficiency in Indonesia? A two-stage analysis. Applied Economics, 2016, 1-15.

Deprins, D., Simar, L., and Tulkens, H. (1984). Measuring labor-efficiency in post offices, in Marchand, M., Pestieau, P., and Tulkens, H. (Eds). The performance of public enterprises–Concepts & measurement. Amsterdam, North-Holland,

-267.

Farandy, A.R., Suwito, D.A., and Dabutar, L.K. (2017). Efficiency of Islamic banks in Indonesia: Data envelopment analysis. International Journal of Economics, Management and Accounting, 25(2), 337-354.

Farrell, M.L. (1957). The Measurement of Productive Efficiency. Journal of The Royal Statistical Society, 120, 253-281.

Freixas, Xavier and Rochet, Jean-Charles. (2008). Microeconomics of Banking 2nd Edition, The MIT Press, Cambridge, Massachusetts, London, England.

Geys, B., and Moesen, W. (2009). Measuring local government technical (in) efficiency: An application and comparison of FDH, DEA and econometric approaches. Public Performance & Management Review, 32(4), 499-513.

Green, R., and Cook, W.D. (2004). A free coordination hull approach to efficiency measurement. Journal of the Operational Research Society, 55, 1059-1063.

Gutierrez-Goiria, J., San-Jose, L., & Retolaza, J.L. (2017). Social Efficiency in Microfinance Institutions: Identifying How to Improve It. Journal of International Development, 29(2), 259-280.

Hadhek, Z., Frifita, M., and Hamida, A. (2018). The determinants of cost efficiency of Islamic banks using SFA approach. International Research Journal of Finance and Economics, 168, 33-47.

Hassan, M. K. (2006). The X-efficiency in Islamic banks. Islamic Economic Studies, 13(2), 49-78.

Hidayati, N., Siregar, H., and Pasaribu, S.H. (2017). Determinant of efficiency of the Islamic banking in Indonesia. Bulletin of Monetary, Economics and Banking, 20(1), 29-47.

Hussein, K. A. (2004). Banking Efficiency in Bahrain: Islamic vs. Conventional Banks: Islamic Development Bank, Islamic Research and Training Institute.

Islamic Banker Association. (2018). Global Islamic Finance Report 2018.

Jemric, I., and Vujcic, B. (2002). Efficiency of banks in Croatia: A DEA approach. Croation National Bank. Working paper, 7 February 2002.

Kamarudin, F., Sufian, F., Loong, F.W., and Anwar, N.A.M. (2017). Assessing the domestic and foreign Islamic banks efficiency: Insights from selected Southeast Asian countries. Future Business Journal, 3, 33-46.

Kamarudin, F., Sufian, F., and Nassir, A.M. (2016). Does country governance foster revenue efficiency of Islamic and conventional banks in GCC countries? EuroMed Journal of Business, 11(2), 181-211.

Kamarudin, F., Sufian, F., and Nassir, A.M. (2016b). Global financial crisis, ownership and bank profit efficiency in the Bangladesh’s state owned and private commercial banks. Contaduria y Administracion, 61, 705-745.

Kamarudin, et al. (2008). Assessing production efficiency of Islamic banks and conventional bank Islamic windows in Malaysia. International Journal of Business and Management Research, 1(1), 31-48.

Kasman, A., and Carvallo, O. (2014). Financial stability, competition and efficiency in Latin American and Caribbean banking. Journal of Applied Economics, 17(2), 301-324.

Leleu, H. (2009). Mixing DEA and FDH models together. The Journal of the Operational Research Society, 60(12), 1730-1737.

Masoumi, M.M., Lotfi, F.H., and Mobasseri, A.M. (2010). DEA and multi-objective shortest path problems. Contemporary Engineering Sciences, 3(2), 53-62.

Mehdiloozad, M., and Roshdi, I. (2012). Complete closest-target based directional FDH measures of efficiency in DEA. Journal of Optimization in Industrial Engineering, 11, 53-61.

Nafla, A., and Hammas, A. (2016). Islamic finance, financial crisis, and determinant of financial stability: Empirical evidence throughout the two approaches. Journal of Islamic Banking and Finance, 4(1), 47-59.

Omar, M.A., Majid, M.S.A., and Rulindo, R. (2007). Efficiency and productivity performance of the national private banks in Indonesia. Gadjah Mada International Journal of Business, 9(1), 1-18.

Oscar, Yazar. (2008). Health Care Benchmarking and Performance Evaluation: An Assessment using Data Envelopment Analysis. Springer, Newton MA.

Otoritas Jasa Keuangan. (2019). Sharia Banking Statistics, June 2019.

Ozdemir, Asli. (2013). Integrating analytic network process and data envelopment analysis for efficiency measurement of Turkish commercial banks. Banks and Bank Systems, 8(2).

Park, B.U., Simar, L., and Weiner, C. (2000). The FDH estimator for productivity efficiency scores: Asymptotic properties. Econometric Theory, 16, 855-877.

Pramuka, B.A. (2009). Assessing profit efficiency of Islamic banks in Indonesia: An intermediation approach. Journal of Economics, Business and Accountancy Ventura. 14(1), 79-88.

Rahmawati, R. (2015). The cost efficiency of Islamic bank in Indonesia: A stochastic frontier approach and data envelopment analysis. Bulletin of Monetary, Economics and Banking, 17(4), 461-484.

Rani, L., Rusydiana, A., and Widiastuti, T. (2017). Comparative analysis of Islamic bank’s productivity and conventional bank’s in Indonesia period 2008-2016. In 1st International Conference on Islamic Economics, Business and Philanthropy

(ICIEBP 2017), 118-123.

Rusydiana, Aam S. (2018a). Indeks malmquist untuk pengukuran efisiensi dan produktivitas bank syariah di Indonesia. Jurnal Ekonomi dan Pembangunan LIPI, 26(1), 47-58.

Rusydiana, Aam S. (2018b). Efisiensi dan stabilitas bank umum syariah di Indonesia. Jurnal Akuntabilitas, 11(2), 203-222.

Rusydiana, Aam S., and Sanrego, Y.D. (2018). Measuring the performance of Islamic banking in Indonesia: An application of Maslahah efficiency quadrant (MEQ). Journal of Islamic Monetary Economics and Finance, 3(SI), 103-130.

Rusydiana, Aam S, and Firmansyah, I. (2017). Efficiency versus Maqasid sharia index: An application on Indonesia Islamic bank. Shirkah Journal of Economics and Business, 2(2), 139-166.

Sakti, M.R.P., and Mohamad, A. (2018). Efficiency, stability and asset quality of Islamic vis-a-vis conventional banks: Evidence from Indonesia. Journal of Islamic Accounting and Business Research, doi.org/10.1108/JIABR-07-2015-0031.

Sanei, M., and Chatghayeh, S.M. (2013). Using free disposal hull models in supply chain management. International Journal of Mathematical Modelling & Computations, 3(2), 125-129.

Saoqi, A. A. Y. (2017). Analyzing the Performance of Islamic Banking in Indonesia and Malaysia: Maqasid Index Approach. Jurnal Ekonomi Islam, 8(1).

Schaeck, K., and Cihak, M. (2014). Competition, efficiency and stability in banking. Financial Management, Spring 2014, 215-241.

Shahreki, Javad, Nazar Dahmardeh and Mohammad Ali Ghasemi. (2012). Efficiency Evaluation Bank Sepah Branches in Sistan and Baluchestan Province Using Data Envelopment Analysis. Interdisciplinary Journal of Contemporary

Research in Business, 4(2).

Sufian, F. (2006). The Efficiency of Islamic Banking Industry in Malaysia: Foreign Versus Domestic Banks, Paper, INCEIF Colloquium, Malaysia, April.

Tauchmann, H. (2012). Partial frontier efficiency analysis. The Stata Journal, 12(3), 461-478.

Thrall, R.M. (1999). What is the economic meaning of FDH? Journal of Productivity Analysis, 11, 243-250.

Tsolas, Ioannis E. and Dimitris I. Giokas. (2012). Bank branch efficiency evaluation by means of least absolute deviations and DEA. Managerial Finance, 38(8).

Tulkens, H. (1993). On FDH efficiency analysis: Some methodological issues and applications to retail banking, courts and urban transit. The Journal of Productivity Analysis, 4, 183-210.

Vincova, I.K. (2005). Using DEA models to measure efficiency. BIATEC, 13, 24-28.

Wahid, M. A. (2016). Comparing the Efficiency of Islamic and Conventional Banks Based on the Evidence from Malaysia. Journal of Muamalat and Islamic Finance Research, 13(1).

Wang, T.F., Song, D.W., and Cullinane, K. (2003). Container port production efficiency: A comparative study of DEA and FDH approaches. Journal of the Eastern Asia Society for Transportation Studies, 5, 698-713.

Widiarto, I., and Emrouznejad, A. (2015). Social and financial efficiency of Islamic microfinance institutions: A data envelopment analysis application. Socio-Economic Planning Sciences, 50, 1-17.

Yotopolous, P.A., and L.J. Lau. (1973). A test for relative economic efficiency: Some further results. American Economic Review, 63(1), 214-223.

Yudistira, D. (2003). Efficiency in Islamic banking: an empirical analysis of 18 banks. Unpublished Paper, Leicestershire: Department of Economics, Loughborough University, UK.

Zainal, N.S., and Ismail, M. (2010). Concept and measurement of efficiency: A review. Voice of Academia, 5(1), 17-26.

Zeitun, R. and Benjelloun, H. (2013). Efficiency of banks and the financial crisis in a developing economy: The case of Jordan. Journal of Finance, Accounting and Management, 4(1), 1-20.

Published
2019-11-01
How to Cite
Rusydiana, A., & Marlina, L. (2019). FINANCIAL AND SOCIAL EFFICIENCY ON INDONESIAN ISLAMIC BANKS: A NON-PARAMETRIC APPROACH. Journal of Islamic Monetary Economics and Finance, 5(3), 579-602. https://doi.org/10.21098/jimf.v5i3.1154
Section
Articles