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DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS

Year 2012, Volume: 4 Issue: 1, 41 - 55, 01.06.2012

Abstract

This paper examines determinants of bank performance in Indonesia for the period of 1994-1999. It was pooled cross-sectional time series and dynamic panel data models. This research incorporates the traditional Structure-Conduct- Performance (SCP) and Relative Efficiency (RE) hypotheses. The estimation results show that bank performance industry is competitive, and implies that market structure in Indonesian banking sector is nearly perfect competition. However, no evidence has been found in this study in support of the traditional SCP, while RE is otherwise. The negative relationship between loans to business groups and bank performance, which is likely due to the high loans provided to them, thus supporting the moral hazard hypothesis. The negative relationship between market share loan and return on assets, the negative relationship between debt-to-total assets and bank performance is likely because of the high level of debt. The negative relationship between debt-to-total assets and bank performance in a scenario of high interest rates indicates that banks acted responsibly by paying high interest charges prevailing at that time. This also results in the negative relationship between capital adequacy ratio and bank performance

References

  • Arnott, R., & Stiglitz, J.E. (1988). The basic analytic of moral hazard. NBER Working
  • Paper Series, 24 (82), 1 – 55 Athanasoglou, P. P., Brissimis, S.N., & Delis, M. D. (2005). Bank-specific, industry- specific and macroecomonic determinant of bank profitability. Working Paper , Bank of Greece 25, 1-37.
  • Bain, J.S. (1951). Relation of profit to industry concentration: American manufacturing,
  • – 1940. The Quarterly Journal of Economics, 65 (3), 293 - 324.
  • Bank Indonesia. (1988). Himpunan Peraturan Perundang-Undangan Paket Kebijaksaan
  • Keuangan, Moneter and Perbankan 27 October Basir, A.H.M. (2000). Determinants of profitability and rate of return margins in Islamic bank: some evidence from the middle est.-mail: Bashirah@aplha0.gram.edu, Prepared for the ERF’s Seventh Annual Conference, October. Amman Jordan.
  • Berger, A.N., Hunter, W.C., & Timme, S.G. (1993). The efficiency of financial institutions: A Review & Preview old Research Past Present and Feature. Journal of
  • Banking and Finance, 17, 221-249. Chirwa, E.W.T.(2001). Market Structure, liberalization and performance in the Malawian banking industry. AERC Research Paper, 108, 1-55.
  • Church, J. & Ware, R. (2000). Industrial Organization: A strategic approach, Publisher
  • McGraw-Hill, Singapore Chowdhury, P.R. (2005). Group-lending: sequential financing, lender monitoring and joint liability. Journal of Development Economics, 77, 415 – 439.
  • Daruri, A.D., Edward, D. (2004). BPPN Garbage In Garbage Out. Center for banking crisis (CBC). Jakarta- Indonesia
  • Demsetz, H. (1973). Industry structure, market rivalry, and public policy. Journal of Low and Economics, 16, 1 - 9.
  • Dendawijaya, L. (2001). Manajemen perbankan. Jakarta, Ghalia Indonesia.
  • Fu, X., & Hefferman, S. (2005). China: The effects of bank reform on structure and performance. Working Paper Cass Business School, City University, London
  • Gilbert, R.A. (1984). Studies of bank market structure and condition: A review and evaluation. Journal of Money, Credit & Banking, 16, 617-644.
  • Goddord, J., Molyneux, P.,&Wilson, J.O.S.(2004). The profitability of European banks:
  • A cross-sectional and dynamic panel analysis, The Manchester School, 72, (3), 363-381. Goldberg & Rai.(1996). The structure-performance relationship for European banking.
  • Journal of Banking & Finance, 20, 745-771. Guru, B. K., Staunton, J., & Shanmugam, B. (2000) Determinants of commercial bank profitability in Malaysia. Asian Academy of Management Journal, 5, (2), 1 - 22
  • Hausman, D.M., & McPherson, M.(1988). Economic analysis and moral philosophy.
  • Cambridge University Press. Husnan, S.(2001). Indonesia in corporate governance and finance in East Asia: A study of
  • Indonesia, Republic of Korea, Malaysia, Philippines and Thailand. Volume two, edited by : Zhung J, David Edwards and Virginia A. Coupling, Asian Development Bank. Kuncono, M., & Suharjono. (2002). Manajemen Perbankan. Teori dan aplikasi, Edisi pertama, BPFE Yogyakarta.
  • Laffont, J.J. (2003). Collusion and group lending with adverse selection. Journal Of
  • Development Economic, 70, 329 - 348
  • Laffont, J.J., & Rey, P. (2001). Collusion and group lending with moral hazard. Mimeo, IDEI, 1 - 17.
  • Laporan Bank Indonesia. (1997)
  • Laporan Bank Indonesia. (2000)
  • Levine, R., & Zervos, S. (1998). “Stock markets, banks, and economic growth,”
  • American Economic Review, 88, 537-558. Mahmood, R.(1998). Perbankan dan pemberian pinjaman. (Siri pengurusan dan perniagaan Utusan). Percetakan Cergas (M) SDN. BHD. Kuala Lumpur.
  • Molyneux, P., & Forbes, W. (1995). Market structure and performance in European banking. Applied Economics, 27, 155-159
  • Mora, R. G., Villarreal, E. S., & Benitez, M.V. (2005). Profitability, concentration and efficiency in the Mexican banking industry. 1-24. Google. Ernesto, Sepulveda, ernesto_sepulveda@banxico.org.mx.
  • Nasution, A. (1993). Reforms of the Financial sector in Indonesia, 1983-1991. The Indonesian Quarterly, XXI, (3), 284 - 310.
  • Neuberger, D. (1998). Industrial organization of banking: A review. International Journal of the Economics of Business, 5, (1), 97-118.
  • Pangestu, M. (2002) The unfinished story of the Indonesia bank restructuring: in search of a happy ending?. Mimeo at The Technical Group Meeting, G24, Beirut, March 1-2.
  • Peltzman, S, (1997). The gains and losses from industrial concentration. Journal of law and economics, 20, 229-263.
  • Piloff, S.J., & Rhoades, S.A (2002). Structure and profitability in banking markets.
  • Review of Industrial Organization,20, 88-98. Siamat, D. (1993). Manajemen Bank Umum, Intermedia, Jakarta.
  • Smirlock, M. (1985). Evidence of (non) relationship between concentration and profitability in banking. Journal of Money and Banking, 17, 69 - 83.
  • Smirlock, M., Gilligan, T., & Marshall, W. (1986). Tobin’s q and the structure- performance relationship: Reply, The American Economic Review, 76 (5), pp. 1211
  • Sinkey, J.F. Jr (1983). Commercial bank financial management,. Macmillan Publishing
  • *** Value significant at the 1% level ** Value significant at the 5% level * Value significant at the 10% level 2(10) =184.186751, P – Value = 0.0000
Year 2012, Volume: 4 Issue: 1, 41 - 55, 01.06.2012

Abstract

References

  • Arnott, R., & Stiglitz, J.E. (1988). The basic analytic of moral hazard. NBER Working
  • Paper Series, 24 (82), 1 – 55 Athanasoglou, P. P., Brissimis, S.N., & Delis, M. D. (2005). Bank-specific, industry- specific and macroecomonic determinant of bank profitability. Working Paper , Bank of Greece 25, 1-37.
  • Bain, J.S. (1951). Relation of profit to industry concentration: American manufacturing,
  • – 1940. The Quarterly Journal of Economics, 65 (3), 293 - 324.
  • Bank Indonesia. (1988). Himpunan Peraturan Perundang-Undangan Paket Kebijaksaan
  • Keuangan, Moneter and Perbankan 27 October Basir, A.H.M. (2000). Determinants of profitability and rate of return margins in Islamic bank: some evidence from the middle est.-mail: Bashirah@aplha0.gram.edu, Prepared for the ERF’s Seventh Annual Conference, October. Amman Jordan.
  • Berger, A.N., Hunter, W.C., & Timme, S.G. (1993). The efficiency of financial institutions: A Review & Preview old Research Past Present and Feature. Journal of
  • Banking and Finance, 17, 221-249. Chirwa, E.W.T.(2001). Market Structure, liberalization and performance in the Malawian banking industry. AERC Research Paper, 108, 1-55.
  • Church, J. & Ware, R. (2000). Industrial Organization: A strategic approach, Publisher
  • McGraw-Hill, Singapore Chowdhury, P.R. (2005). Group-lending: sequential financing, lender monitoring and joint liability. Journal of Development Economics, 77, 415 – 439.
  • Daruri, A.D., Edward, D. (2004). BPPN Garbage In Garbage Out. Center for banking crisis (CBC). Jakarta- Indonesia
  • Demsetz, H. (1973). Industry structure, market rivalry, and public policy. Journal of Low and Economics, 16, 1 - 9.
  • Dendawijaya, L. (2001). Manajemen perbankan. Jakarta, Ghalia Indonesia.
  • Fu, X., & Hefferman, S. (2005). China: The effects of bank reform on structure and performance. Working Paper Cass Business School, City University, London
  • Gilbert, R.A. (1984). Studies of bank market structure and condition: A review and evaluation. Journal of Money, Credit & Banking, 16, 617-644.
  • Goddord, J., Molyneux, P.,&Wilson, J.O.S.(2004). The profitability of European banks:
  • A cross-sectional and dynamic panel analysis, The Manchester School, 72, (3), 363-381. Goldberg & Rai.(1996). The structure-performance relationship for European banking.
  • Journal of Banking & Finance, 20, 745-771. Guru, B. K., Staunton, J., & Shanmugam, B. (2000) Determinants of commercial bank profitability in Malaysia. Asian Academy of Management Journal, 5, (2), 1 - 22
  • Hausman, D.M., & McPherson, M.(1988). Economic analysis and moral philosophy.
  • Cambridge University Press. Husnan, S.(2001). Indonesia in corporate governance and finance in East Asia: A study of
  • Indonesia, Republic of Korea, Malaysia, Philippines and Thailand. Volume two, edited by : Zhung J, David Edwards and Virginia A. Coupling, Asian Development Bank. Kuncono, M., & Suharjono. (2002). Manajemen Perbankan. Teori dan aplikasi, Edisi pertama, BPFE Yogyakarta.
  • Laffont, J.J. (2003). Collusion and group lending with adverse selection. Journal Of
  • Development Economic, 70, 329 - 348
  • Laffont, J.J., & Rey, P. (2001). Collusion and group lending with moral hazard. Mimeo, IDEI, 1 - 17.
  • Laporan Bank Indonesia. (1997)
  • Laporan Bank Indonesia. (2000)
  • Levine, R., & Zervos, S. (1998). “Stock markets, banks, and economic growth,”
  • American Economic Review, 88, 537-558. Mahmood, R.(1998). Perbankan dan pemberian pinjaman. (Siri pengurusan dan perniagaan Utusan). Percetakan Cergas (M) SDN. BHD. Kuala Lumpur.
  • Molyneux, P., & Forbes, W. (1995). Market structure and performance in European banking. Applied Economics, 27, 155-159
  • Mora, R. G., Villarreal, E. S., & Benitez, M.V. (2005). Profitability, concentration and efficiency in the Mexican banking industry. 1-24. Google. Ernesto, Sepulveda, ernesto_sepulveda@banxico.org.mx.
  • Nasution, A. (1993). Reforms of the Financial sector in Indonesia, 1983-1991. The Indonesian Quarterly, XXI, (3), 284 - 310.
  • Neuberger, D. (1998). Industrial organization of banking: A review. International Journal of the Economics of Business, 5, (1), 97-118.
  • Pangestu, M. (2002) The unfinished story of the Indonesia bank restructuring: in search of a happy ending?. Mimeo at The Technical Group Meeting, G24, Beirut, March 1-2.
  • Peltzman, S, (1997). The gains and losses from industrial concentration. Journal of law and economics, 20, 229-263.
  • Piloff, S.J., & Rhoades, S.A (2002). Structure and profitability in banking markets.
  • Review of Industrial Organization,20, 88-98. Siamat, D. (1993). Manajemen Bank Umum, Intermedia, Jakarta.
  • Smirlock, M. (1985). Evidence of (non) relationship between concentration and profitability in banking. Journal of Money and Banking, 17, 69 - 83.
  • Smirlock, M., Gilligan, T., & Marshall, W. (1986). Tobin’s q and the structure- performance relationship: Reply, The American Economic Review, 76 (5), pp. 1211
  • Sinkey, J.F. Jr (1983). Commercial bank financial management,. Macmillan Publishing
  • *** Value significant at the 1% level ** Value significant at the 5% level * Value significant at the 10% level 2(10) =184.186751, P – Value = 0.0000
There are 40 citations in total.

Details

Other ID JA78VC72BP
Journal Section Articles
Authors

Buyung Sarita This is me

Gholamreza Zandi This is me

Alireza Shahabi This is me

Publication Date June 1, 2012
Published in Issue Year 2012 Volume: 4 Issue: 1

Cite

APA Sarita, B., Zandi, G., & Shahabi, A. (2012). DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS. International Journal of Economics and Finance Studies, 4(1), 41-55.
AMA Sarita B, Zandi G, Shahabi A. DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS. IJEFS. June 2012;4(1):41-55.
Chicago Sarita, Buyung, Gholamreza Zandi, and Alireza Shahabi. “DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS”. International Journal of Economics and Finance Studies 4, no. 1 (June 2012): 41-55.
EndNote Sarita B, Zandi G, Shahabi A (June 1, 2012) DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS. International Journal of Economics and Finance Studies 4 1 41–55.
IEEE B. Sarita, G. Zandi, and A. Shahabi, “DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS”, IJEFS, vol. 4, no. 1, pp. 41–55, 2012.
ISNAD Sarita, Buyung et al. “DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS”. International Journal of Economics and Finance Studies 4/1 (June 2012), 41-55.
JAMA Sarita B, Zandi G, Shahabi A. DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS. IJEFS. 2012;4:41–55.
MLA Sarita, Buyung et al. “DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS”. International Journal of Economics and Finance Studies, vol. 4, no. 1, 2012, pp. 41-55.
Vancouver Sarita B, Zandi G, Shahabi A. DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING: A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS. IJEFS. 2012;4(1):41-55.