DETERMINANTS OF BANK PROFIT EFFICIENCY: EVIDENCE FROM INDONESIA

Abstract

This study investigates the determinants of banks’ profit efficiency over period 2005-2009 in Indonesian banks. Specifically it examines bank size, credit risk, capital, ownership structure and market share on banks profit efficiency. A two stage research methods is employed. First, the scores of bank efficiency are estimated using Stochastic Frontier Analysis (SFA). Second, the scores obtained are linked to a series of determinants of bank efficiency using regression techniques. The results show that score efficiency of bank in Indonesia is still inefficient. Therefore that there is a high potential to increase profit efficiency in Indonesian banks. Other result show that size, capital, ownership structure and market share of bank have significant impact on bank profit efficiency but credit risk has insignificant impact on bank profit efficiency. These results offer practical contribution to bank managers, practitioners and policy makers on the relevance of a number driving factors of bank efficiency that might help them to improve bank efficiency and banking system efficiency

Keywords

• bank profit efficiency, stochastic frontier analysis and ownership structure

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