Measuring the competition and banking efficiency level: a study at four commercial banks in Indonesia

Abstract

The banking sector plays a vital role in the economy of each country. Banks are required to operate in a sound, efficient, and reliable manner in order to stimulate economic growth. To achieve that, a basic framework for the Indonesian banking system has been developed, known as the Indonesian Banking Architecture (IBA) aimed at strengthening the structure and enhancing the competitiveness of the banking industry. This study aimed to analyze the level of competition, the ability, and influence of the competition on banks efficiency, so banks can maintain the performance level and provide economic growth. This study used a quantitative approach with a panel regression analysis model. The results have shown that the banking industry in Indonesia tends to be monopolistic. The character of many sellers, differentiated products, sellers freely entering and leaving the market, as well as the presence of advertisement and product quality competitions were examined. Bank competition that leads to a monopolistic market structure stimulated banks to achieve higher profits and put bank projects and financing at high risk. Competition had a negative correlation with bank efficiency because competition encourages banks to focus on profit rather than efficiency, engage in risky financing/projects, and undertake high lending activities. Moreover, four big banks in Indonesia are in the “too big to fail” position. Banking regulators in Indonesia must maintain and produce reliable and stable banks to compete globally. AcknowledgementThe authors would like to thank all those who have contributed to the completion of this article, especially the leadership of the Department of Economics and the Faculty of Economics and Business, Brawijaya University, who provided facilitation for publication in reputable international journals.