THE CONVERGENCE TEST OF INDONESIAN BANKING INEFFICIENCY: DO MACROECONOMIC INDICATORS MATTER?

This paper analyzes the inefficiency convergence of Indonesian banks using Stochastic Frontier Analysis and panel data estimation, covering the period after the financial crisis 2008 to 2017. This paper also investigates the determinants of this inefficiency implying the convergence. To estimate the inefficiency rate, proxied by price of loan, this paper uses three inputs including price of labor, price of capital, and price of funds. Our analysis shows that during 2008-2017 the inefficiency score converged at a speed of 26.2 %. Furthermore inflation, gross domestic product, and exchange rate significantly affect the growth of inefficiency convergence. This paper contributes to the empirical literature particularly on banking research. Overall, the findings imply that policymakers can mitigate the effects of the global financial crisis by lowering interest rates, providing fiscal stimulus, as well as protecting the poorest from financial deterioration.