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Electronic copy available at: http://ssrn.com/abstract=1895211
EFFECT OF CAPITAL STRUCTURE ON BANKS PERFORMANCE :
A PROFIT EFFICIENCY APPROACH
ISLAMIC AND CONVENTIONAL BANKS CASE IN INDONESIA
Ade Salman Al-Farisi 1, Riko Hendrawan
2
1 PT. Bank Mandiri Tbk.
2 TELKOM Institute of Management
ABSTRACT
Banks were knowned to have volatile capital structure caused by their financial liquidity. This
paper aims to examine the impact of capital structure towards performance of two group of
banks, conventional and Islamic banks, by using profit efficiency approach. Two stages
procedure were employed. In the first stage we measure profit efficiency score for each bank in
Indonesia during year 2002-2008 by using distribution free approach (DFA). In the second stage
we employ banks’ capital ratio to measure their impact towards their performance.
Output from the first stage indicate that bank’s average profit efficiency scores equal to 0,60.
Whereas the maximum score equal to 0,78. So there is still room around 0,18 Indonesian banks
to improve their performance. The output also indicate the Islamic banks in Indonesia succeed to
place their position at top 20% highest profit efficiency score.
Result from the second stage indicate that bank’s capital ratio have a negative effect on their
profit efficiency. Futhermore, the negative effect happened to be higher for the Islamic bank
group compared to conventional bank. This result consistent with Diamond & Rajan (2001)
opinion that higher capital could degrade bank’s profit performance.
Keyword : capital structure, conventional bank, islamic bank, liquidity, profit efficiency.
JEL : G.21
________________________________________ Corresponding author :
TELKOM Institute of Management
Jl. Gegerkalong Hilir No.47, Bandung 40152, West Java- Indonesia
Tel.: + (62222035691); fax: +(62222033830).
E-mail address: : [email protected]
Electronic copy available at: http://ssrn.com/abstract=1895211
1. INTRODUCTION
Both Islamic and conventional banks run the same financial intermediaries function. The term
Financial intermediary simply means a business that interacts with 2 types of individuals and
institutions in the economy (Rose & Hudgins, 2008 : 1) Deficit spending individuals and
institutions, whose current expenditures for the consumption and invesment exceed their current
receipts of income and who therefore need to raise funds externally through borrowing and
issuing stock, 2) Surplus spending institutions and individuals, whose current receipt of income
exceed their current expenditures on goods and services so that they have surplus funds that can
be saved and invested. Intermediaries perform the indispensable task of acting as a bridge
between these two groups, offering convenient financial services to surplus-spending units in
order to attract funds and allocating it to deficit spenders.
On the other hand, although both bank runs the same intermediation function, the basis utilized
by Islamic Banks is the profit / revenue sharing principle, differ from conventional banks that
based on market interest. The profit /revenue sharing basis might influence the Islamic bank’s
capital structure, as indicated by Moody’s Investor Service (2008) :
“However, unlike conventional banks, the charges attached to funding cost is supposed to be a
function of the asset’s yields, as per the core principle of profit sharing..”.
“With the profit / revenue sharing basis, there are possibilities where Islamic Banks’ profit
might get higher or lower in a certain period. In this situation Islamic Banks’ needed additional
capital as a buffer to cover this volatility. The additional capital usually knowned as investment
risk reserve or profit equalization reserve”
Based on empirical data during the year 2002-2008 for two Islamic banks (Bank Muamalat
Indonesia / BMI and Bank Syariah Mandiri / BSM) and one conventional bank (Bank BCA) in
Indonesia we can see some differences on their ROE (return on equity) ratio, where ROE at BMI
and BSM are lower and more fluctuative compared to BCA :
Electronic copy available at: http://ssrn.com/abstract=1895211
Table 1
Return on Equity BCA, BMI, BSM 2002-2008
Year BCA BMI BSM
2002 22.1% 15.2% 9.9%
2003 18.9% 9.9% 5.4%
2004 22.9% 8.0% 27.4%
2005 22.7% 12.5% 21.6%
2006 23.5% 15.0% 13.7%
2007 22.0% 10.3% 20.7%
2008 23,0% 31,2% 23,5%
Mean 22.2% 14.6% 17.5%
Std. Dev 1.5% 7.8% 8.0% Source : Processed from Annual Financial Statement of Bank BCA,
Bank Muamalat and Bank Syariah Mandiri 2002- 2008.
From the table 1 above, shows that BCA’s average ROE equal to 22,2%, higher compared to
BMI’s ROE (14,6%) and BSM (17,5%). Also with standard deviation equal to 1,5%, BCA’s
ROE is more stable compared to BMI (7,8%) and BSM (8%). The capital ratio for each bank are
as follow :
Table 2
Capital Ration BCA, BMI, BSM 2002-2008
Tahun BCA BMI BSM
2002 9.8% 20.3% 27.0%
2003 9.5% 21.5% 13.1%
2004 9.4% 24.1% 8.0%
2005 10.6% 22.9% 7.6%
2006 10.3% 27.8% 7.3%
2007 9.4% 20.1% 6.3%
2008 9,3% 7.7% 7.06%
Mean 9,8% 20,6% 10,9%
Std. Dev 0,5% 6,3% 7,4% Source : Processed from Annual Financial Statement of Bank BCA, Bank
Muamalat and Bank Syariah Mandiri 2002- 2008.
From the table 2 above, shows that BMI and BSM have higher capital structure ratio (Total
Equity / Total Asset) and more fluctuative compared to BCA. This condition could create
questions from the stakeholder about the Islamic bank’s performance.
Moody’s Investor Service (2008), have indicated that with the profit / revenue sharing basis,
there are some possibilities where Islamic Banks’ profit might get higher or lower in certain
period. In this situation Islamic Banks’ needed additional capital as a buffer to cover this
volatility. The additional capital usually knowned as investment risk reserve or profit
equalization reserve.
Diamond & Rajan (2001) argued that banks set up a volatile capital structure. This volatile
capital structure to cover their liquidity. Volatile capital structure enables banks to continue to to
channel loans which were illiquid and raise new deposit which were liquid. But capital addition
will lower bank’s deposit ratio, affecting the maximum amount of credit, and raising their cost of
capital.
Based on some reasons above, this study aims to compare conventional banks and Islamic Banks
performance by using efficiency indicators, and to evaluate the impact of their capital structure
decision towards their performance.
2. LITERATURE REVIEW
2.1. Calculation of Bank’s Efficiency Scores and Application to Measure Bank’s
Performance
De Young (1997) have noted that comparing cost ratios between two banks was improper to do
because there are some differences on their product mix, size, market conditions, and other
characteristics that could influence banks’ cost. Although ratios was easy to formed, he argued
that ratios was hard to be interpreted. Myopic analyses on the expenditures can be misleading.
De Young used stochastic cost frontier analysis that formed the best hypothetical bank in the
population as a benchmark. Stochastic cost frontier alone represents development conception on
efficiency (input-output) in economics.
The Efficiency approach measures the ability of a unit or someone in yielding maximum outputs
with their available inputs / resources. There are two statistical methods in measuring efficiency,
that is parametric statistical methods and non parametric statistical methods. Mlima and
Hjarmalsson (2002) concluded that each method utilized based on the following approach : (1).
Non parametric statistical efficiency utilized for the production or service approach. With this
approach, customer’s deposit were treated as the bank’s output. (2) Parametric statistical
methods utilized for the intermediation or asset approach. With this approach, bank accepts
customer’s deposit as one of their input and distribute it in the form of loan as their output.
Banks mobilize and distribute funds by using their resources efficiently to gain profit.
Di Patti (2000) argued that profit efficiency can be associated with company’s value
maximization concept. Where value of the firm represents a sum of present value of expected
profit in the future. So that failure in company’s value maximization will be related to failure for
the profit maximization with certain risk. Further, profit efficiency is a relative performance
concept that compare companies with the best company in industry as the optimal frontier.
With the efficiency approach, if a company cannot reach the optimal value (represented by the
best company in the industry), things can be measured. We can compare efficiency concept with
value of the firm concept. In the value of the firm concept, changes of value of the firm reflects
fluctuation of performance to expectation and not to their potency. Therefore it could not
indicate – for example - the existence of agency cost problem.
Other reason is that changes on company’s stock market price will reflect differences of market
price, where companies have only limited control over it. While profit efficiency can measure
how a company’s position compared to the best company in industry facing the same condition.
Based on the consideration above, and also to depict more intermediation function on both bank
group, this research will use the profit efficiency approach.
2.2. Bank’s Volatile Capital Structure
Differ from non financial company, liquidity might influence bank’s capital structure. Relations
between the asset side with the liabilities side on bank’s balance sheet made liquidity an issue. In
the asset side of their balance sheet, banks distribute loans / credits which they cannot collect
instantly. Where in the liabilities side, banks raise funds by selling deposit products that can be
withdrawn by depositors at any time. This mismatch condition of liquidity happened because
bank’s liabilities are more liquid compared to their assets. If depositors draw their money at the
same time, it could create a “bank run” (Diamond, 2007). So if depositors consider there are
problems at the banks’ asset side and the bank tries to negotiate or influence their deposit value,
depositors will chose to conduct the “bank run”.
Diamond & Rajan (2001) argued that banks need liquidity after channeling its credit. This
condition can be avoided if the bank can borrow enough money and channel it to entrepeneur.
To support this, banks set up a volatile capital structure. This volatile capital structure enables
banks to continue to to channel loans which were illiquid and raise new deposit which were
liquid. If depositors need to draw their funds, bank can pay them by taking new deposit. So this
matter will be like a never ending process.
Because the nature of deposits are volatile, hence banks needed fixed capital. But capital addition
will lower bank’s deposit ratio, affecting the maximum amount of credit, and raising their cost of
capital.
3. METHODOLOGY
Unit analysis in this research is commercial banks which conducted by census to the 102
conventional banks and 3 Islamic banks in Indonesia. Banks that operate Islamic banking
operations as part of their unit (unit usaha syariah), so their financial statement were mixed
between the conventional and Islamic banking operations, were excluded from the analysis. But
banks that treated their Islamic Banking Unit as a subsidiary, and separate their financial
statement, were included. Banks that do not operate as a commercial bank, were also excluded.
The profit function used in this paper developed by Berger and Di Patti (2003) , Berger and
Mester (1997), which evaluate how close a company in obtaining profit as achieved by the best
company within the same exogent condition. So that company’s profit represents a function from
input, output, and environment variables :
ln (π) = fπ (y,w,v) + ln uπ + ln єπ
Where π represents profit variable, y represents output variable, w represents input variable, and
represents environmental variable that can influence company performance. u represents
controllable factors that may influence efficiency, while є represents uncontrollable factors or
random error.
The Alternative Profit Efficiency model can be depicted as follows :
aπi [ exp {faπ (w
i, y
i, v
i) } x exp (lnu
iaπ) ]
APEFF = ------------- = -----------------------------------------------------
aπmax
[ exp {fiaπ (w
i, y
i, v
i) } x exp (lnu
maxaπ) ]
Berger and Di Patti (2003) also developed Standard Profit Efficiency model. The difference
between the standard an alternative profit efficiency is that the output variable (y) at Standard
Profit Efficiency will be replaced by the price (p). The model specification of profit function
which is used in this research is a translog model (Berger and Di Patti, 2003) as follows :
3 3 3
ln π (w,y,v,t) = α + Σ βi ln yit + ½ Σ Σ βik ln yit ln ykt
3 i=1
3 3 i=1k=1
+ Σ γj ln wjt + ½ Σ Σ γjm ln wjt ln wmt j=1 j=1 m=1
3 3
+ Σ Σ δij ln yjt ln wjt + θ1 ln vt + ½ θ2 (ln vt)2
i=1 j=1
3 3
+ Σ τi ln yjt ln vt + Σ ηj ln wjt ln vt + θ1t
i=1
j=1
3 3
+ ½ θ2t2 Σ Φi ln yjtt + Σ ωj ln wjt t + λt ln vtt + εt (1)
The model measures bank’s profit (π) as a function of three input variables (w1-3), three output
variables (y-1), one environmental variable (v), and time (t)
where :
t = time index
εt = error term, which consist of :
ut = represents inefficiency from bank
zt= normal error term or random noise.
Profit (π) = Variable Profit = Interest Income – Interest Expenses
Input Variables (w), consist of :
w1 = Cost of Labor / Total Asset
w2 = Price from borrowed funds = Interest Expenses / ( Total of Third Party Fund + Marketable
securities + Interbank + Accepted Loans)
w3 = Price from physical capital = ( Non Interest Expense – Labour Cost) / Fixed Asset
Output Variables (y) consist of :
y1 = channeled loans
y2 = Marketable securities (including bonds)
y3 = Net of non interest income
Environmental variable ( v) :
v = monthly inflation rate in Indonesia during research period.
Statistical analysis which were used to test hypothesis in this research is pooled least squared
regression. After the error term for each bank obtained from the regression model above, it will
be used in calculating profit efficiency scores as follows :
1 T
ζ = ----- Σ ζt , so that profit efficiency for each bank were calculated : T t=1
EFF = exp [ζ – max (ζ )]
In the second stage, the following model will be used to test the impact of Capital Ratio towards
bank’s efficiency :
EFFjt = πt + ρCAPjt + ς(DBANK x CAP)jt +єjt (2)
Where :
t = time index
j = the j bank
εt = error term
CAP = Total Equity / Total Asset ratio
DBANK = dummy variable, equal 1 for Islamic bank, and 0 for conventional bank
4. RESULT
Table 3 below shows descriptive statistic of the data . One dependent variable (bank’s profit) and
3 independent variables that have significant effect are as follows :
Table 3
Descriptive Statistics
Bank Profit, Input and Output Variables
Bank Group Item
Dependent Variable Bank’s Profit
(Rp. Mio)
Independent Variables
Labour cost / Total Asset
(w1) Channeled Loans (y1)
Marketable Securities
(y2)
Conventional
Mean 88,056 0.5% 2,928,959 2,224,140
Max 3,584,924 3.5% 126,826,445 161,554,954
Min (128,899) -3.7% 1,549 -
Skewness 6.6 1.3 7.7 8.5
Islamic
Mean 63,811 0.50% 3,339,008 131,098
Max 406,266 1.10% 10,361,619 932,310
Min (41,983) 0.11% 168,468 -
Skewness 2.2 0.6 0.6 1.9
Source : Data processing
Based on table 3 above , we can conclude that :
- The range of profit at conventional banks are larger compared to Islamic bank. Where the
ratio of average profit / total asset of the 102 conventional banks are between 0,24% to
3,43%, while the range for Islamic Banks are smaller that is between 1,51% s.d 1,64%.
- Average of Labour cost / Total Asset in the conventional banks is equal to 0,53% relatively
bigger compared to The Islamic bank group which equal to 0,50%.
Estimation on Bank’s Profit Model
By using pooled least square regression from translog alternative profit efficiency model (1)
above, this research try to depict bank’s intermediation role in using raised funds from society
and channels it in the form of credit to maximize profit. To prevent negative value, a constant
added to the variable profit. And to eliminate heteroskedasticity influence we used white
heteroskedasticity analysis. Output obtained by using eViews data processing is as follow :
Tabel 4
Estimation Result of Bank’s Profit.
Variabel (constant)
Estimasi parameter t-stat
C -6.153663 -2.718874**
LNY1 1.458401 5.463503***
LNY2 -0.295751 -4.226026***
LNY3 0.074965 0.417610
0.5*LNY12 0.022154 3.050833***
0.5*LNY13 -0.057986 -3.072741***
0.5*LNY23 -0.007848 -1.549481
LNW1 -1.630558 -4.336924***
LNW2 -0.443767 -1.387854
LNW3 -0.148965 -0.671960
0.5*LNW12 0.015218 0.230322
0.5*LNW13 -0.242846 -3.107148***
0.5*LNW23 0.181958 1.865010*
LNY1W1 0.148126 4.045404***
LNY1W2 0.069081 1.625500
LNY1W3 0.003526 0.256885
LNY2W1 -0.018110 -3.227066***
LNY2W2 -0.014703 -2.240189**
LNY2W3 -0.014630 -2.899973**
LNY3W1 -0.054474 -1.877800*
LNY3W2 -0.011104 -0.325807
LNY3W3 0.008513 0.855067
INF -18.27145 -1.214993
0.5*INF2 -47.01485 -0.126017
LNY1INF -2.125315 -1.694733*
LNY2INF -0.138811 -0.941623
LNY3INF 1.438600 1.506000
LNW1INF -1.023150 -0.605510
LNW2INF -7.386964 -4.313685***
LNW3INF -1.426113 -1.262630
T 0.026246 0.757958
0.5*T2 -0.000222 -0.274453
LNY1T -0.001467 -1.070161
LNY2T 0.000713 2.049247**
LNY3T 0.002786 2.130935**
Variabel (constant)
Estimasi parameter t-stat
LNW1T -0.002560 -1.080445
LNW2T 0.000385 0.082081
LNW3T 0.007483 3.826306
INFT -0.019561 -0.076795
R-squared : 0.942823
Adjusted R-squared : 0.939406
F-stat : 275.9092
Source : Data processing
* Significant at α = 10%
** Significant at α = 5%
*** Significant at α = 1%
Result from table 4 above shows estimation model of factors that influence bank’s variable
profit. From the result we can conclude that some independent variables, that is channeled loans
(y1), marketable securities (including bonds) (y2), and labour expenses (w1), have a significant
effect on bank’s variable profit. While for some independent variables, the quarterly inflation
rate (v) and the time index (T) do not have significant effect on bank’s variable profit. But
according to Koetter opinion (2005), with the interaction of some variables at the same time,
hence interpretation from each variable becomes not directly. Hence we only consider some
variables that have significant effect and compare it to some former researchs :
* Channeled Loans output variable (y1)
From the regression result we can see that coefficient of the channeled loans output variable is
equal to 1.458401. Positive coefficient number indicate that channeled loans and bank’s profit
growth have a positive relation. This has the same result with the research conducted by Illieva
(2003) and Santos (2007) that found a positive relation with bank’s profit function. While
Koetter (2005) whose research separates between commercial loan and interbank’s loan found a
positive relation between interbanks loan and bank’s profit, but a negative relation for the
commercial loan. Other result came from research by Fitzpatrick, Trevor & Mc Queen, (2005)
who found the relation was not significant.
The high level coefficient of channelled loans variable compared to other output variables,
indicate that channeled loans is a potential variable to improve bank’s profit efficiency. The
same opinion came from research conducted by Haddad et. al. (2003) where they concluded that
channelled loans play important role in determining bank’s profit efficiency.
* Marketable Securities (including bonds) Output Variable (y2)
From regression result we can see significant but negative relation between marketable securities
variable with bank’s profit. Where the coefficient from the variable equals to -0.295751.
Negative coefficient indicate if marketable securities grow higher, then the bank’s profit will fall.
This result differs from Santos’ (2007) research who found significant and negative relation but
with bank’s cost function (not bank’s profit) with coefficient -0,99%. Research from Koetter
(2005) found positive relation with bank’s profit with coefficient 0,790.
* Price of Labour Input Variable (w1)
Coefficient from labour price variable is significant and equal to -1.630558. Negative coefficient
number indicates that higher labour price have negative impact on bank’s profit. This output
matches result from Koetter (2005) with coefficient - 0.387. While two other researches give
different result. Research from Fitzpatrick, Trevor & Mc Queen (2005)and Illieva (2003) found a
positive and significant relation of this variable with bank’s profit.
Estimating Coefficient of Determination (R2)
Coefficient of determination (R2) resulted from the regression equals to 0.942823, meaning that
94.282% of bank’s variable profit were influenced by determinant variables in the model, while
5,718% is influenced by other variables outside the model.
Bank’s Profit Efficiency Scores
By using the error term from the regression model above, we count the profit efficiency scores
for each bank as follows :
1 T
ζ = ----- Σ ζt
T t=1
EFF = exp [ζ – max (ζ )]
Descriptive statistics of the profit efficiency scores for all banks are as follows :
Tabel 5
Descriptive Statistics of The Profit Efficiency Scores
Year 2002-2008
Item Scores
Mean 0.603799
Skewness 1.199675
Min 0.513134
Max 0.776964
N 105 Source : Data processing
Table 5 above shows that the maximum profit efficiency scores equals to 0,776964, while the
average for all banks is 0,603799. Hence on average banks in Indonesia still have room to
improve their profit efficiency scores for 0,776964 – 0,603799 = 0.173165.
The profit efficiency scores for all banks are as follows :
Table 6 Profit Efficiency Scores
Year 2002-2008
No. BANK
Profit Efficiency
Score
1 Standard Chartered Bank 0.777
2 Bank Windu Kentjana International 0.761
3 Deutsche Bank A.G. 0.754
4 Bank China Trust Indonesia 0.753
5 Bank Woori Indonesia 0.752
6 The Bank of Tokyo Mitsubishi 0.742
7 Bank Maybank Indocorp 0.731
8 Bank Syariah Mandiri 0.728
9 J.P Morgan Chase Bank N.A. 0.722
10 Bank UOB Indonesia 0.717
11 Bank Rabobank International 0.717
12 Bank Muamalat Indonesia 0.715
13 Bank KEB Indonesia 0.712
14 Bank Mizuho Indonesia 0.703
15 Bank Ina Perdana 0.701
16 Bank Sumitomo Mitsui Indonesia 0.691
17 Bank Mayapada International 0.690
18 American Express Ltd 0.688
19 ABN Amro Bank 0.682
20 Bank of America N. A 0.673
21 Bank Syariah Mega Indonesia 0.671
22 Citibank N.A. 0.660
23 Bank OCBC Indonesia 0.654
24 Bank Victoria International Tbk 0.652
25 Bank Kesawan 0.652
26 The Bangkok Bank Company Ltd. 0.644
27 Bank Resona Perdania 0.642
28 Bank Swaguna 0.634
29 Bank Eksekutif International 0.615
30 Bank Bumiputera 0.606
31 Bank Himpunan Saudara 1906 0.605
32 Bank BNP Paribas Indonesia 0.597
33 Bank Persyarikatan Utama 0.595
34 Bank ICBC Indonsia 0.594
35 Bank Jasa Arta 0.586
36 Bank Agroniaga 0.586
No. BANK
Profit Efficiency
Score
37 Bank Harda International 0.586
38 Bank Index Selindo 0.585
39 Bank NISP 0.585
40 Bank Mega 0.584
41 Centratama Nasional Bank 0.584
42 Bank Bengkulu 0.583
43 Bank Akita 0.583
44 Bank Harfa 0.574
45 Bank Sinarmas 0.573
46 Bank Central Asia 0.571
47 Bank Bali 0.571
48 Bank Ekonomi Raharja 0.571
49 Bank Hana 0.571
50 Bank Maspion Indonesia 0.571
51 Bank Mestika Dharma 0.571
52 Bank Nusantara Parahyangan 0.571
53 Bank Bisnis International 0.571
54 Bank Harmoni International 0.571
55 Bank Multi Arta Sentosa 0.571
56 Bank Sumatera Barat (Bank Nagari) 0.571
57 Bank Jawa Timur 0.571
58 Bank Papua 0.571
59 Bank Antar Daerah 0.571
60 Bank Bumi Arta 0.571
61 Bank Ganesha 0.571
62 Bank Haga 0.571
63 Bank Hagakita 0.571
64 Bank Lippo 0.571
65 Bank Swadesi 0.571
66 Bank UOB Buana 0.571
67 Anglomas Internasional Bank 0.571
68 Bank Artos Indonesia 0.571
69 Bank Dipo International 0.571
70 Bank Indomonex 0.571
71 Bank Jasa Jakarta 0.571
72 Bank Kesejahteraan Ekonomi 0.571
73 Bank Mitraniaga 0.571
74 Bank Purba Danarta 0.571
75 Bank Sinar Harapan Bali 0.571
No. BANK
Profit Efficiency
Score
76 Bank Sri Partha 0.571
77 Bank UIB 0.571
78 Bank Yudha Bhakti 0.571
79 Prima Master Bank 0.571
80 BPD Kalimantan Timur 0.571
81 BPD Yogyakarta 0.571
82 Bank Lampung 0.571
83 Bank Jambi 0.571
84 Bank Sulawesi Selatan 0.571
85 Bank Jawa Tengah 0.571
86 ANZ Panin Bank 0.571
87 Bank Commonwealth 0.569
88 Bank Nusa Tenggara Timur 0.569
89 Bank Pan Indonesia Bank 0.560
90 BPD Sulawesi Tenggara 0.557
91 Bank Maluku 0.556
92 Bank Mayora 0.555
93 Bank Sulawesi Utara 0.555
94 Bank Mandiri 0.554
95 Bank Century 0.553
96 Bank Tabungan Pensiunan Nasional 0.547
97 Bank Kalimantan Tengah 0.543
98 Bank Royal Indonesia 0.542
99 Bank Fama International 0.541
100 Bank Finconesia 0.540
101 Bank Metro Express 0.539
102 Bank Alfindo 0.532
103 Liman International Bank 0.524
104 Bank DBS Indonesia 0.515
105 Bank Sulawesi Tengah 0.513
Source : Data processing
From table 6 above, shows that Standard Chartered Bank has the highest profit efficiency score
(score 0,7769) whereas Bank Sulawesi Tengah has the lowest profit efficiency scores (score
0,5131). For the three Islamic bank, ranked between the 20% of the highest profit efficient
banks, that is: BSM ( ranked 8, score 0,728), BMI ( ranked 12, score 0,715) and Bank Mega
Syariah Indonesia (ranked 21, score 0,671).
If we grouped the banks based on their owners, descriptive statistic to the profit efficiency scores
shall be as follows :
Tabel 7
Descriptive Statistics of The Profit Efficiency Scores
Based on Bank’s Owner Year 2002-2008
Item
Government Banks
Private Forex
Private Non Forex
Rural Banks
Joint Banks Foreign Banks
Mean 0.5539 0.5941 0.5778 0.5636 0.6641 0.7047
Skewness 1.7696 1.8871 (2.2576) (0.5758) 0.3351
Min 0.5539 0.5391 0.5237 0.5131 0.5154 0.6445
Max 0.5539 0.7279 0.7006 0.5832 0.7613 0.7770
N 1 29 33 17 16 9
*Including 3 Islamic banks Source of : Data processing
Based on the ownership, can be seen that on average foreign banks group represent the most
efficient banks in using all of their resources (input and output resources) in running the
intermediation function to yield profit. The next most efficient groups are : joint banks, private
foreign exchange bank, private non foreign exchange banks, rural banks and government banks.
Foreign bank group as the highest profit efficient groups are similar to the research output
according to Hadad, Santoso & Mardanugraha (2003), where for the year of 2001 – 2003 foreign
banks group represent the most efficient.
Estimation of the Model : Influence of The Capital Structure Towards Profit Efficiency
At the second stage, regression of the capital ratio towards bank’s profit efficiency score as
according to model (2) above resulting the following output :
Table 8
Regression Output
The Effect of Capital Ratio towards Bank’s Profit Efficiency
Variables Coefficient Std. Error
t-
Statistic Prob. Prob
C 0.722816 0.000700 1031.858 0.0000 Significant
CAP -0.470281 0.060061
-
7.830090 0.0000 Significant
DBANK*CAP 0.133089 0.059725 2.228359 0.0281 Significant
R-squared 0.725207 Adjusted R-Squared 0.719819
Prob (F-Stat) 0
Source : Data processing
Islamic Bank ρCAP coefficient : -0,470281
Conventional bank ρCAP coefficient : -0,470281 + ς = -0,470281 + 0,133089 = -0.337192
Analysis of the Influence Total Equity / Total Asset Ratio to Profit Efficiency
Based on the output above, we can see that the Total Equity / Total Asset (CAP) have a negative
slope which is equal to -0,4703 for the Islamic bank and -0,33712 for the conventional bank.
This model also have coefficient determination (R2) that is 0,725, so we can conclude that
partially additional capital can explain 72,5% bank’s profit efficiency. Also based on the variable
coefficient above, every 1% increase Total Equity/Total Asset ratio will caused 0,33%
degradation on conventional bank’s profit efficiency scores and 0,4703% degradation for the
Islamic bank. Differences of this coefficient indicate that additional capital addition will have
higher negative effect towards profit efficiency scores at the Islamic bank compared to the
conventional bank. This result consistent with Diamond and Rajan (2001) opinion, where larger
capital addition have the potency to degrade bank’s profit performance.
5. CONCLUSION AND SUGGESTION
By using pooled least square method to estimate translog profit efficiency model, some variables
that influence significantly to bank’s profit are : channelled loans (positive effect), marketable
securities (negative effect), labour cost (a negative effect). While other variables do not have
significant effect. Based on residual estimation, average profit efficiency score to the entire
banks equal to 60,38%, whereas the maximum profit efficiency score equal to 77,70%. Thereby
on average banks in the sample still have room to improve their resources allocation to increase
profit by 77,70% – 60,38 = 17,32%.
Standard Chartered Bank has the highest profit efficiency score (77,70%) while Bank Sulawesi
Tengah has the lowest score (51,30%).
From the entire 105 banks, the three Islamic banks ranked in the 20% most profit efficient, that
Bank Syariah Mandiri (rank 8), Bank Muamalat Indonesia (rank 12) and Bank Mega Syariah
(rank 21). So that although there is an indication that Islamic Banks’ might needed additional
capital that could create their relatively low ROE compared to their conventional peers, but
descriptively can be said that Islamic banks can manage their input and output variables good
enough in yielding profit.
The Ratio of Total Equity / Total Asset have a negative and significant effect towards both
Islamic and Conventional Banks’ profit efficiency. This result consistent with the opinion that
additional capital could degrade bank’s profit performance. We also noted that additional capital
will have higher negative effect on Islamic banks’ performance compared to conventional banks.
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