Technical Efficiency of Indonesian Commercial Banks: An Application of Two-Stage DEA

Abstract

This paper uses data envelopment analysis (DEA) to investigate the technical efficiency of the Indonesian commercial banks over the period 2004-2009 using intermediation approach. The analysis is conducted based on common frontier of duration of study and ownership of the banks, namely state-owned banks and private banks. Then Tobit regression model is used to examine the influence of internal factors as bank characteristics to efficiency scores. The results of DEA show that Indonesian commercial banks could improve their technical efficiency by 10.5% on average and the scale inefficiency is dominating over pure technical inefficiency. The commercial state-owned banks are showing perfect efficiency during the period of study, and proven to be more efficient compared to the commercial private banks. Finally Tobit regression is revealing that higher asset scale and liquidity risk increase the efficiency of the bank, while the profitability is on the contrary.