Cost Efficiency of Indonesia’s Banking Industry: A Comparison between Community Development Banks, Government Banks and Private Banks

Abstract

The unique characteristic of the banking system in Indonesia is the existence of a community development bank (CDB), which is owned by the local government. This study tested the efficiency of costs against other types of banks, namely private bank and Government-owned banks. The sample of the study consisted of 15 community development banks, 56 private banks, and 3 Government bank from 1995 until 2006. Using the methodology of panel data, we find that the efficiency community development banks are at least as good as other types of banks. There are two explanations of this finding is, first, the CDB received high deposits from local government , the second, the CDB doesn’t need to pay interest to the Government of the region. Third, the staffs of the community development banks accept smaller salaries than private banks. To our knowledge, this is the first study that looks at the cost-efficiency of community development banks as compared to other types of banks of banks in Indonesia. Meanwhile, the average efficiency cost of the bank the Government is higher than for CDB and private banks. Banks that has the equity number of over IDR 100 billion was more efficient than the bank had a total equity of less than IDR 100 billion.