Efficiency and Ownership Structure: Evidence from Rural Banks in Indonesia

  • Wahyu Jatmiko

Abstract

This paper aims at examining whether ownership structure, which is represented by ownership concentration and type of ownership, affects the technical efficiency of both Islamic and conventional rural banks in Indonesia. First, this study estimates the efficiency score of Islamic and conventional rural banks using Stochastic Frontier Analysis (SFA). The findings suggest that the gap of efficiency level holds among the Islamic Rural Banks (BPRS), yet unobservable in the case of their conventional counterparts (BPR). Management of BPRS is under a big question as the results also indicate that the Islamic microfinance institutions’ inefficiency is getting more severe over time. Second, by using Generalized Linear Model (GLM), this study points out that ownership concentration can explain the inefficiency of BPRS. Relationship between ownership and efficiency appears in cubic polynomial, instead of traditional linear form. It shows that expropriation and alignment effects are jointly embedded in the BPRS. This allows derivation of minimum and maximum turning point of BPRS ownership, which would be very beneficial for policy recommendations.

References

ADB. Finance for the Poor: Microfinance Development Strategy. Manila: Asian Development Bank, 2000.

Ahmed, H. “Frontiers of Islamic Banking: A Synthesis of Social Role and Microfinance.” The European Journal of Management and Public Policy 3, no. 1 (2004): 120-40.

Ahmed, H. Product Development in Islamic Bank. Edinburgh: Edinburgh University Press Ltd, 2011.

Ahmed, H. “Financial Inclusion and Islamic Finance: Organisational Formats, Products, Outreach, and Sustainability.” In Economic Development and Islamic Finance, edited by Zamir Iqbal and Abbas Mirakhor, 203-29. Washington, D.C.: The World Bank, 2013.

Ahmed, H., and Tariqullah Khan. “Risk Management in Islamic Banking”. In Handbook of Islamic Banking, edited by M. Kabir Hassan and Mervyn K. Lewis, 144-158. Cheltenham and Northampton: Edward Elgar, 2007.

Aiello, F., and G. Bonanno. “Bank Efficiency and Local Market Conditions. Evidence from Italy.” Journal of Economics and Business 83 (2015): 1-31.

Aigner, D., C. Lovell, and P. Schmidt. “Formulation and Estimation of Stochastic Frontier Models.” Journal of Econometrics 6, no. 1 (1977): 21-37.

Asutay, M. “Conceptualisation of the Second Best Solution in Overcoming the Social Failure of Islamic Banking and Finance: Examining the Overpowering of Homoislamicus by Homoeconomicus.” IIUM Journal of Economics and Management 15, no. 2 (2007): 167-95.

Battese, G.E., and T.J. Coelli. “A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Functon for Panel Data.” Empirical Economics 20 (1995): 325-32.

Belanes, A., Z. Ftiti, and R. Regaieg. “What Can We Learn About Islamic Banks Efficiency Under The Subprime Crisis? Evidence from GCG Region.” Pacific-Basin Finance Journal 33 (2015): 81-92.

Berger, A.N., and L.J. Master. “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Instituitons?” Journal of Banking and Finance 21, no. 7 (1998): 895-947.

Berger, A.N., L.J. Master, Hasan, I., and Zhou, M. “Bank Ownership and Efficiency in China: What Will Happen in the World's Largest Nation?” Journal of Banking and Finance 33 (2009): 113-30.

Berry, A., E. Rodriguez, and H. Sandee. “Firm and Group Dynamics in the Small and Medium Enteprise Sector in Indonesia.” Small Business Economics 18 (2002): 141-61.

Bonin, J. P., I. Hasan, and P. Wachtel. “Bank Performance, Efficiency and Ownership.” Journal of Banking and Finance 29 (2005): 31-53.

Central Intelligence Agency. “The World Factbook”. Central Intelligence Agency. https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

Charnes, A., W. Cooper, and E. Rhodes. “Measuring the Inefficiency of Decision Making Units.” European Journal of Operational Research 2, no. 6 (1978): 429-44.

Cho, M.-H. “Ownership Structure, Investment, and The Corporate Value: An Empirical Analysis.” Journal of Financial Economics 47 (1988): 103-21.

Claessens, S., S. Djankov, J.P. Fan, and L.H. Lang. “Disentangling the Incentive and Entrenchment Effects of Large Shareholdings.” The Journal of Finance 57, no. 6 (2002): 2741-71.

Cornett, M.M., L. Guo, S. Khaksari, and H. Tehranian. “The Impact of State Ownership on Performance Difference in Privately-Owned Versus State-Owned Bank.” Journal of Financial Intermediation 19 (2010): 74-94.

Delis, M., and N. Papanikolaou. “Determinants of Bank Efficiency: Evidence from A Semi-Parametric Methodology.” Managerial Finance 35, no. 3 (2009): 260-75.

Donkor, J., and K. Tweneboa-Kodua. “Probability, Liquidity and Efficiency of Rural Banks: Evidence from Ghana.” British Journal of Economics, Finance and Management Sciences 8, no. 1 (2013): 1-11.

Enu-Kwesi, F., F. Koomson, and R. Baah-Mintah. “The Contribution of the Kakum Rural Bank to Poverty Reduction in the Komenda-Edina-Eguafo-Abrem Municipality in the Central Region, Ghana.” Economic Annals 57, no. 197 (2013): 121-39.

Farrell, M.J. “The Measurement of Productive Efficiency.” Journal of the Royal Statistical Society, 120, no. 3 (1957): 253-90.

Ferri, G. “Are New Tigers supplanting Old Mammoths in China's banking system? Evidence from a sample of city commercial banks.” Journal of Banking and Finance 33 (2009): 131-140.

Hassan, S., Othman, Z., and Mukaramah, H. “Ownership Structure and Firm Efficiency.” Asian Social Science 10, no. 11 (2014): 233-41.

Hermes, N., R. Lensink, and A. Meesters. “Outreach and Efficiency of Microfinance Institutions.” World Development 39, no. 6 (2011): 938-48.

Huda, A.N. “Development of Islamic Financing Scheme for SMEs in a Developing Country: The Indonesian Case.” Procedia - Social and Behavioural Sciences 52 (2012): 179-86.

Huges, J.P., and L.J. Master. “Bank Capitalization and Cost: Evidence of Scale Economies in Risk Management and Signaling.” The Review of Economics and Statistics 80, no. 2 (1998): 314-25.

Hulme, David, and Paul Mosley. Finance Against Poverty (Vol. 2). London: Routledge, 1996.

Jensen, M.C., and W.H. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics 3, no. 4 (1976): 305-60.

Khankhoje, D., and M. Sathye. “Efficiency of Rural Banks: The Case of India.” International Business Research 1, no. 2 (2008): 140-49.

Lin, X., and Y. Zhang. “Bank Ownership Reform and Bank Performance in China.” Journal of Banking and Finance 33 (2009): 20-29.

Maddaloni, G. “Liquidity Risk and Policy Options.” Journal of Banking and Finance 50 (2015): 514-27.

Masyita, D., and H. Ahmed. “Why is Growth of Islamic Microfinance Lower than its Conventional Counterparts in Indonesia.” Islamic Economics Studies 21, no. 1 (2013): 35-62.

Meeusen, W., and J.v. Broeck. “Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error. International Economic Review 18, no. 2 (1977): 435-44.

Micco, A., U. Panizza, and M. Yanez. “Bank Ownership and Performance. Does Politics Matter?” Journal of Banking and Finance 31 (2007): 219-41.

Mourougane, Annabelle. Promoting SME Development in Indonesia. Paris: Organization for Economic Co-operation and Development, 2012.

Muazaroh, T. Eduardus, S. Husnan, and M.M. Hanafi. “Determinants of Bank Profit Efficiency: Evidence from Indonesia.” International Journal of Economics and Finance Studies 4, no. 2 (2012): 163-73.

OJK. Indonesian Banking Statistics. Jakarta: Otoritas Jasa Keuangan, 2015.

Parinduri, R.A., and Y.E. Riyanto. “Bank Ownership and Efficiency in the Aftermath of Financial Crises: Evidence from Indonesia.” Review of Development Economics 18, no. 1 (2014): 93-106.

Reddy, K., and Y. Yin. “The Relationship between Ownership Identity, Ownership Concentration, and Firm Operating Efficiency: Evidence from China 2005-2012.” Paper presented at the Asian Finance Association Conference 2015, Changsha, Hunan Province, China, 29 June-1 July 2015.

Salami, K.A. “Analysis of The Relationship Between Share Ownership Structure, Corporate Governance Structure, and Corporate Investment Efficiency, Using GSE, Market Data 2005 - 2009.” Journal of Accounting and Finance, 11, no. 4 (2011): 111-7.

Seibel, H.D. “Islamic Microfinance in Indonesia: The Challenge of Institutional Diversity, Regulation, and Supervision.” Journal of Social Issues in Southeast Asia 23, no. 1 (2008): 86-103.

Seibel, H.D., and W.D. Agung. “Islamic Microfinance in Indonesia.” Working Paper University of Cologne (2006): 1-66.

Servin, R., R. Lensink, and M. van den Berg. “Ownership and Technical Efficiency of Microfinance Institutions: Empirical Evidence from Latin America.” Journal of Banking and Finance 36 (2012): 2136-44.

Shawtari, F.A., B. Saiti, and S.H. Razak. “The Impact of Efficiency on Discretionary Loans/Finance Loss Provision: A Comparative Study of Islamic and Conventional Banks.” Borsa Istanbul Review 15, no. 4 (2015): 1-11.

Shleifer, A., and R. Vishny. “A Survey of Corporate Government.” The Journal of Finance 52, no. 2 (1997): 737-783.

Sokic, A. “Cost Efficiency of The Banking Industry and Unilateral Euroisation: A Stochastic Frontier Approach in Serbia And Montenegro.” Economic Systems 39, no. 3 (2015): 541-51.

Staikouras, C., E. Mamatzakis, and A. Koutsomanoli-Filippaki. “Cost Efficiency of Banking Industry in The South Eastern European Region.” Journal of International Financial Markets, Institutions and Money 18, no. 5 (2008): 483-97.

Sturm, J., and B. Williams. “Foreign Bank Entry, Deregulation and Bank Efficiency: Lessons From The Australian Experience.” Journal of Banking and Finance 28, no. 7 (2004): 1775-99.

Subandi. “An Efficiency Determinant of Banking Industry in Indonesia.” Research Journal of Finance and Accounting 5, no. 3 (2014): 18-26.

Utama, C.A., and W. Jatmiko. “Pengaruh Struktur Kepemilikan Keluarga dan Pemerintah Terhadap Kerugian Kredit Bank.” Indonesian Journal for the Science of Management 14, no. 2 (2015): 113-31.

Viverita, and M. Ariff. “Efficiency Measurement and Determinants of Indonesian Bank Efficiency.” Academy of Financial Services (2011): 1-20.
Published
2017-08-31
How to Cite
JATMIKO, Wahyu. Efficiency and Ownership Structure: Evidence from Rural Banks in Indonesia. International Journal of Economics, Management and Accounting, [S.l.], v. 25, n. 2, p. 355-380, aug. 2017. ISSN 2462-1420. Available at: <http://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/523>. Date accessed: 14 dec. 2017.