Efficiency of the Islamic Rural Bank in Six Zones of Indonesia

By  Syafaat Muhari, Muhamad Nadratuzzaman Hosen

Abstract

Islamic Rural Bank (IRB) in Indonesia are placed in diverse geographical conditions. Indonesia is an archipelago with a centralized economy in the Java Island. Thus the performance of IRB between Java region and out of Java region has different characteristics. This study aims to measure the level of efficiency of the IRB region which is divided into six zones (Jakarta, West Java-Banten, Central Java-Yogyakarta, East Java, Sumatra and Eastern Indonesia) by using the method of Data Envelopment Analysis (DEA) as nonparametric method and Stochastic Frontier Approach (SFA) as parametric method. The division in six regional zones is vital given that IRB has different characteristics between regions that needs solutions that fits each character. This study shows that the IRB in Eastern Indonesia is more efficient than the five other regions in Indonesia either by using the approach of DEA and SFA. The results of this study are expected to be input for each stakeholder along with the publication of the Draft Regulation of the Financial Services Authority (RPOJK) on Rural Bank in Indonesia to, then be formulated into regulation. Moreover, it can be concluded that the DEA is more appropriate to measure the efficiency of IRB in Indonesia given the existence of some constraints in using the SFA approach, which is not normal distribution of the data as well as data that does not meet the assumption of homogeneity.