| Summary: | Indonesia plays as the largest economy in Southeast Asia so that it is not impossible to be influenced by the international economic environment (World Bank, 2019). The banking industry has a significant impact on the Indonesian economy and has experienced several changes over the past decades. The study will describe the Indonesian banking system and use the concept of cost efficiency to analyze how efficient are banks in Indonesia. Meanwhile, the study will try to find the determinants and explain why they can influence bank efficiency.
The dissertation studies the level of cost efficiency in selected banks in Indonesia over the period 2013-2018. The stochastic frontier analysis (SFA) is applied to measure cost efficiency. On average, the cost efficiency score tends to decrease slightly over six years, from 0.9621 to 0.9413. Also, this dissertation analyzes the determinants that influence the level of cost efficiency by employing the Tobit regression model. The study finds that as bank-specific elements, bank size, net loans, and loan loss provisions negatively affect bank efficiency, while non-performing loans are positively related. For macroeconomic factors, GDP growth rate and inflation rate have a positive relationship with Indonesian banks’ efficiency, but the coefficient of the unemployment rate shows negative.
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