COMPETITION AND EFFICIENCY OF ISLAMIC RURAL BANK IN CENTRAL JAVA, INDONESIA: A COMPARATIVE STUDY ISLAMIC AND CONVENTIONAL RURAL BANK

Abstract

Purpose

The purpose of this study is to examine the competition and the efficiency between the Islamic Rural Banks (IRB) and The Conventional Rural Banks (CRB) in Central Java, Indonesia.

Methodology

This study used descriptive analysis and non-parametric frontier method with Data Envelopment Analysis (DEA) to measure competition and efficiency. Production approach was used to determine input and output. This study uses personnel costs, interest costs, and other costs as input, and for define the output we use loans and deposit. We can’t found the revenue from securities investment and service because the function of rural bank are collecting and distribute funds only. The data in this study were 23 Islamic rural banks and 152 conventional rural banks in Central Java Indonesia at the period 2011-2012.

Result

The results of this study showed that the average of efficiency of Conventional Rural Banks were increased within the obsertvation periode, but for Islamic Rural Bank (IRB) were decrease. The average of efficiency of IRB is higher than CRB in Central Java.

Key words:

Islamic rural bank, Efficiency, Data Envelopment Analysis, Production approach.

INTRODUCTION

Banking activities who have task to transfer surplus units to deficit units is one of the other factor the country’s stability. So, Islamic banking is always interesting to be discussed. Until the end of 2012, there have been standing 11 commercial Islamic banks, 29 bank who open islamic/ syariah unit, and 154 Islamic rural bank in Indonesia.  (Bank Indonesia, 2012).

The interesting of society in Islamic Financial Institution are also increase along with awareness of Indonesian Muslim on Riba. The rapid development of this very reasonable view data on the BPS states of the Indonesian population> 87% Moslem.

Public interest in the Islamic financial institutions also are increasing awareness of Indonesian Muslims haramnya usury. Riba is forbidden in Islamic economic jurisprudence (fiqh) and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.. Riba is an additional decision of the principal or capital assets vanity.

The difference of Islamic and Conventional bank principle will certainly affect the efficiency and financial performance. The purpose of the shareholders welfare through the optimization of profit in Islamic banking is limited by the terms of the islamic economic jurisprudence as:

1) do not lack the usury/ riba;

2) participation in the capital containing risk sharing;

3) does not contain gharar (uncertainty);

4) Good faith of the binding contract to reduce moral hazard; and

5) activities based on Islamic principles (investments unrelated dg drink alcohol, gambling, cigarettes, and others.

Because of the existence of these restrictions, Islamic banks can not easy to seek profits from credit. Because in the Islamic religion, people are owed to others have aim to help and not for profit. Investments or credits will be given to approval of the Sharia Supervisory Board (DPS). It becomes interesting to study the efficiency of Islamic banks. In general, the efficiency can be defined as the ratio / ratio of output to input. A company will use some of the inputs optimally to produce the maximum output. Measurement of efficiency can use parametric and non-parametric techniques. This research will use a non-parametric technique of efficiency with DEA method was first introduced by Charnes, Cooper, and Rhodes.

THE HISTORY OF ISLAMIC BANKING IN INDONESIA

Business of Islamic banking continued to show an increased level of competition. Islamic banks started to stand up when the application of the profit/ loss sharing began to be recorded in the Malaysian and Pakistani hajj funds in the non-conventional management. Subsequently in 1963, the pioneering institutional Islamic Rural Bank was built in Cairo, Egypt. In 1970, in a meeting of Foreign Ministers of the Islamic Organizations country in Pakistan, Egypt proposed Islamic Banking shall be established. In 1973, at a session of the OKI foreign ministers in Libya, the proposal re-discussed. Finally, when the 1975 session of the OKI in Jeddah finances minister, draft establishment of Islamic banks which at the time was called the Islamic Development Bank (Islamic Development Bank) with an initial capital of 2 billion dinars agreed. All members of IDB is the OKI members. IDB gives interest-free loans for infrastructure development to member states based capital supplied (Antonio, 2001)

According the history, Islam entered Indonesia from the 13th century through trade among nations in a peaceful atmosphere (Rival, 2012). While the practice of Islamic economy, has been around a long time-sharing practices through agriculture and fisheries.

While in the banking business, Islamic banking began to be known since 1991 with the establishment of Bank Muamalat Indonesia on the initiative of the MUI and the Government. In 1990, the MUI organize workshops bank interest and banking in Cisarua, Bogor, and at that time formed a working group to establish Islamic banks in Indonesia.

The development of Islamic banking next show encouraging improvement in banking, then stood up Islamic banking such as Bank Syariah Mandiri as the first Islamic commercial bank owned by the government and conventional banks began to open Islamic units such as banks IFI, Bank Niaga, Bank BNI, Bank BTN, etc.

Currently, Islamic banking growing Indonesia economy coloring. Noted there are 188 Islamic banking which consists of commercial banks, Islamic business unit, and SRB sharia; 2017 branch offices; and assets of more than 127T (Islamic banking outlook BI, 2012).

RELATED STUDIES

Mochtar,  et al (2008) who test the efficiency of Islamic Banking in Malaysia with DEA method concluded that the conventional banking is more efficient than Islamic banks. Nevertheless the observation period of Islamic banking is always an increase in efficiency. The samples used are 20 Islamic banks and 20 banks konvensiona 1997-2003

Sufian, F. (2007) conducted research in Malaysia Islamic Bank efficiency by comparing the foreign and domestic banks. He concluded that the average efficiency of Islamic banks in Malaysia during the study period increased. Domestic Islamic bank more efficient than foreign Islamic bank. The study was conducted using non-parametric methods DEA. The study period was from 2001 to 2004. It same with the research of Tahir, I et all (2011) conclude that banks in middle east region were more efficient than banks in non-middle east region.

Hadad et al (2003) in a study that tested the efficiency of Indonesian Bank concluded that the credits associated with the development of the bank has a very high potential to increase the overall efficiency. Based on DEA method, private banks non-foreign national can be said to be the most efficient for 3 years (2001-2003) in the analysis of 8-year period (1996-2003) compared to other banks. Foreign banks mixture had to be the most efficient in 1997, while the foreign national private banks in 1998 and 1999.

METODOLOGI PENELITIAN

The data used in this research is a secondary data with the population are Islamic and Conventional Rural Banks in Central Java who are registered at Bank Indonesia in 2010-2012. The sampling technique was purposive sampling. To determine input and output we used production approach where we assume that rural banks are institutions that cultivate existing inputs into outputs. Therefore, the variables that we use are:

Table I

The variables Input and Output

There are two approaches used to measure the level of efficiency of the banking industry. They are parametric approach and non-parametric approach. In this particular study using a non-parametric approach with the DEA method (Data Envelopment Analysis).

Medianto (2007), in his thesis reveals the DEA is a measure of the relative efficiency is used to evaluate how a decision-making process in a unit, in this case the Islamic and Conventional Rural Banks. DEA model used in this study is the BCC, which is also known as the VRS (Variable Return to Scale) assumes that each additional unit of input by no means followed by the addition of one unit of output, additional output can be greater than one or less than one. The basic reason is because the use of VRS, not all rural banks operating at the optimal scale.

Production process is said to be efficient if it use of a particular input to produce the optimal amount of output or to produce a certain number of outputs used inputs are minimal. With both variables (input and output) are the researchers wanted to compare the level of efficiency of absorption rate and the distribution of funds.

RESULTS

Islamic rural bank in Jawa Tengah shown increasing day by day. It is shown from the number of Islamic rural banking that always increases. Their assets are increase too. The entire population of Islamic banks registered in Central Java in Bank Indonesia since 2011-2012 we obtained a total sample of 175 Islamic banks who consisting of 23 Islamic Rural Banks and 152 Conventional Rural Banks.

Table I shows the average value of bank assets in Rural Bank Central Java. The percentage assets of Islamic Rural Bank increase and higher than conventional rural bank banks. This suggests that the enhancement of public investment in Rural Islamic Banks is Higher than the Conventional Rural Banks.

Tabel II

Asset Rural Bank di Jawa Tengah

DEA is measure of the relative efficiency in Decision Making Unit (DMU) units compared to units that are considered the most efficient. Thus, in the DEA analysis is possible some units have efficiency 1.000. Value 1.000 is a number that indicates that the most efficient unit in a particular data set. Table II is the result of data processing by using DEA Frontier. From the data processing show that more conventional rural banks in each region in Central Java showed a less efficient compared to rural Islamic banks. However, unlike the conventional rural banks which show an increase in the efficiency of years of observation (2011-2012), Islamic Rural Banks actually shows the opposite. Performance efficiency Islamic Rural Banks decreased during the observation period which is equal to 0.092%.

Table II

Efficiency Islamic and Conventional Rural Bank

CONCLUSION

Based on the calculation DEA, the several Islamic Rural Bank in Central Java still has inefficiencies. Islamic Rural Bank who are not efficient exist in Banyumas, Magelang, Kebumen and Surakarta. Inefficiency Islamic rural banks in this area can be caused by the input and output variables are not optimal managing, such as employee salaries, percentage profit sharing to customers, administration cost, financing facilities and the amount of deposits and savings that can be achieved.

In the study period, the average efficiency of Islamic Rural Bank is decline. Whereas, Conventional Rural Bank improve the efficiency during the period of observation. If the average efficiency of rural Islamic banks compared with conventional banks throughout rural areas in Central Java, it is known that rural Islamic banks have better efficiency levels.

REFERENCE

Mochtar, A et all. 2008. Efficiency and competition of Islamic banking in Malaysia. Humanomics. Vol. 24 No. 1, 2008 pp. 28-48

Hadad, M et all. 2003. Analisis Efisiensi Industri Perbankan Indonesia: Penggunaan Metode Non-parametrik Data Envelopment Analysis (DEA). Jurnal bank Indonesia.

Maflachatun. 2010. Analisis Efisiensi Teknik Perbankan Syariah di Indonesia Dengan Metode  Data Envelopment Analysis (DEA)   (Studi Pada 11 Bank Syariah Tahun 2005-2008). Skripsi. Universitas Diponegoro

Fadzlan, S. 2007. The Efficiency of Islamic Banking Industry in Malaysia Foreign vs Domestic Banks. Humanomics.Vol. 23 No. 3, 2007 pp. 174-192

Tahir, I et all. 2011. Evaluating efficiency of Islamics banks Using Data Enveloptemn Analysis: International Evidence. Journal of Islamic Economics, Banking and Finance. Vol 7 No 1. 2011.

Yudhistira, D. 2004. Efficiency in Islamic Banking: An Empirical Analysis of Eighteen Banks. Islamic Economic Studies. Vol. 12, No. 1, August 2004