Journal of Islamic Accounting and Business Research

Efficiency, stability, and asset quality of Islamic vis-à-vis conventional banks: evidence from Indonesia
Muhammad Rizky Prima Sakti, Azhar Mohamad,
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banks: evidence from Indonesia", Journal of Islamic Accounting and Business Research, https://doi.org/10.1108/
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 Efficiency, Stability, and Asset Quality of Islamic vis-à-vis Conventional Banks:
Evidence from Indonesia

Abstract

In this paper we examine how Indonesian Islamic banks differ from conventional banks in
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terms of their business model, asset quality, stability, and efficiency. Based on data from
2008 to 2012, we employ t-test, z-score, and Data Envelopment Analysis (DEA) to assess the
business model as well as the asset quality, stability, and efficiency of both the Islamic and
conventional banks. Our results indicate that there are significant differences between the
two – Islamic banks appear to not follow the conventional business model. Secondly, Islamic
banks seem to have better asset quality and to be more stable than their conventional
counterparts. Finally, the DEA results also indicate that Islamic banks are relatively more
efficient than conventional banks, as shown by their higher overall efficiency, as well as
technical efficiency.

1
 1. INTRODUCTION

One of the key questions in Islamic banking and finance research is whether Islamic

banking is more stable and resilient than its conventional counterpart during and outside of

crises. Some researchers, such as Siddiqi (2006) and Mirakhor (2009), argue that financial

institutions with Islamic sharia-based principles tend to have greater economic stability.

Kuran (2004), however, disagrees with the notion that the Islamic economic system is
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superior to others, and that Islamic banks are more efficient and stable. To investigate this

argument, Čihák and Hesse (2010) test the financial stability of Islamic banks using a cross-

country analysis over 18 countries. They find that small Islamic banks are financially stronger

than both small and large conventional banks, but that large Islamic banks are weaker than

large conventional banks.

In theory, Islamic banking products have some pertinent features that are quite

different from their conventional counterparts. Particularly, Islamic finance requires Islamic

banking products to avoid riba (charging of interest payments), gharar and prohibited

activities such as those involving pork, pornography, liquor, and gambling. Profit and loss

sharing (PLS) techniques, namely mudarabah and musharakah, which originated from

classical Islamic jurisprudence, are instituted to avoid riba. In Islam, business transactions

must be backed by real economic activities. As such, these aspects indicate a clear difference

in business and financing activities between Islamic and conventional banks. In conventional

banks, product developments are concerned with economic aspects such as return, risk, and

efficiency. In Islamic banks, additional requirements that comply with sharia principles have

to be considered.

Islamic financing products such as mudarabah and musharakah have high capital

requirements compared to debt-based products such as murabahah. Thus, banks are likely to

choose the latter mode. Islamic banks mimic conventional instruments by creating assets

2
 through non-PLS, such as debt-based instruments with a fixed rate of return (Cevik and

Charap 2011). Chong and Liu (2009) state that Islamic deposit rates mimic the conventional

deposits rates in Malaysia. Islamic deposit rates are not interest-free, yet they are closely tied

to the conventional deposit rate. Similarly, ijarah-based products that initiate from

operational leases also have higher capital requirements than financial lease products,

although the operational lease is more sharia-compliant than the financial lease. In this
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regard, this study will test the differences between the business models of Islamic and

conventional banks as indicated by income and funding structure.

Our study is motivated by Beck, Demirgüç-Kunt, and Merrouche (2013), who study

the difference between Islamic and conventional banks in 22 countries but, due to limitations

in their data, do not cover the Indonesian Islamic banking system. In Indonesia, both Islamic

and conventional banks coexist and operate side by side. Many conventional banks created

spin-offs from their Islamic arms of full-fledged Islamic banks, upon the establishment of the

blueprint for Islamic banking development, initiated by the Bank of Indonesia in 2002

(Abduh and Omar 2012). Islamic banks also mushroomed under demand from Muslim

customers in Indonesia for banking transactions that complied with Islamic principles. As

such, both government regulation and the increasing demand caused Islamic banks in

Indonesia to flourish.

According to a report by the Otoritas Jasa Keuangan/Financial Services Authority

(OJK), the size of Islamic banks was registered at Rp 242 trillion in 2013, triple the 2010

figure of Rp 81 trillion (see figure 1). Islamic banks saw double-digit asset growth of 24% in

2013. Bank Syariah Mandiri (BSM) dominates, with the largest share of total assets (Rp 54.2

trillion or 27.8%), followed by Bank Muamalat and BRI Syariah with Rp 44.9 trillion and Rp

14.1 trillion of total assets respectively (see table 1). However, despite the total assets of Rp

242 trillion in 2013, the market share of Islamic banks was still relatively low at 4.8%.

3
 <Insert Figure 1 here>

<Insert Table 1 here>

The financing to deposit ratio (FDR) and non-performing financing (NPF) of Islamic

banks indicate good performance and the rapid development of Islamic banks. In general, the

NPF of Islamic banks is still below 5% but in 2013 it increased slightly to 2.8% from the

2012 figure of 2.7% (source: OJK). The asset quality indicators of Islamic banks remain
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better than those of conventional banks, suggesting their better ability to manage credit risk.

Aside from that, the mushrooming development of Islamic banks requires a better efficiency

measurement that can help them to increase their business and performance.

This study also addresses the issue of efficiency in Islamic banks and conventional

banks in Indonesia. Specifically, in the first stage, we examine the overall technical efficiency

(OTE), pure technical efficiency (PTE), and scale efficiency (SE) of Islamic and conventional

banks in Indonesia using the non-parametric technique of Data Envelopment Analysis

(DEA). In the second stage, we regress the efficiency scores from the DEA on several

variables in order to measure the determinants of Islamic and conventional banks’ efficiency.

At present, the studies on Islamic banking efficiencies have attracted considerable

attention from academicians, regulators, and policy makers throughout the world (see Darrat,

2002; Yudistira, 2004; Hassan, 2006; Mohamad et al., 2008; Shahid et al., 2010). Despite the

growing interest on this issue from a global perspective, in Indonesia however, studies on the

efficiency of Islamic banks are only few in number. Only a little research by the likes of

Yudistira (2004), Viverita et al. (2007), and Ascarya and Yumanita (2008) has examined this

issue of the efficiency in Islamic banking in Indonesia. Other Indonesian researchers like

Ismal (2010), Abduh and Sukmana (2011), and Hutapea and Kasri (2010) focused on

liquidity management, deposit behavior, and margin determination of Islamic banking.

Generally speaking, the issues of the business model, asset quality, and stability of Islamic

4
 banks are under researched in Indonesia. An efficiency study is very important as we believe

for Islamic banking to stay in business it must be efficient and have an edge to compete with

conventional banking.

From an empirical view, the study attempts to bridge the gap in the literature on the

efficiency, business model, stability, and asset quality of Islamic and conventional banks in

Indonesia. Beck and Demirguc-Kunt (2013) perform a cross-country analysis to study the
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differences between Islamic and conventional banks. However, little attention has been paid

in the case of Indonesia. This study adds to the existing literature by providing an

econometric model to multiple-regress various variables pertaining to the business model,

asset quality, and stability of both Islamic and conventional banks in Indonesia. In addition,

this study attempts to fill the gap in the literature by providing recent empirical evidence

concerning the efficiency of Islamic and conventional banks in Indonesia.

Our foremost contribution is that this is the first paper to compare the efficiency,

stability, and asset quality of Islamic and conventional banks in Indonesia. By using the latest

data and a large sample, we hope the findings will be more relevant than previous studies to

the current situation of Islamic and conventional banks in Indonesia. Beck, Demirgüç-Kunt,

and Merrouche (2013) conduct a cross-country analysis to study differences between Islamic

and conventional banks from 22 countries. There are 166 conventional banks and 41 Islamic

banks in their sample; however, there is no comparative analysis available between Islamic

and conventional banks in the case of Indonesia. Firdaus and Hosen (2013) measure the

efficiency of 10 Islamic banks in Indonesia using DEA. Yet, their study does not examine the

efficiency scores and determinants. We use a sample comprising 37 Islamic banks and 11

conventional banks in Indonesia. With this paper we hope to contribute to a growing

literature on the development of Islamic banking and finance in Indonesia.

5
 From a practical angle, the study will help both regulators of conventional and Islamic

banks to know whether the Islamic and conventional banks have managed their assets

efficiently. The performance and efficiency of Islamic banking is of considerable importance

for the regulators in the developing Islamic banking industry in Indonesia.

The rest of the paper is organised as follows: In section 2, we provide the literature

review and theoretical framework. Section 3 outlines the data and methodology. Section 4
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describes the empirical findings. Finally, section 5 describes the main findings and

implications.

2. LITERATURE REVIEW

2.1. Theoretical Framework

In Islamic banking, the profit motive is not the ultimate objective. Compliance with

sharia principles differentiates Islamic banking operations from those of its conventional

counterpart. The business model of Islamic banks is based on PLS, through mudharabah and

musharakah contracts. At first glance, the business orientation of Islamic banks should be

different from conventional banks as indicated by their balance sheets and income statements.

Beck, Demirgüç-Kunt, and Merrouche (2013) argue that, in the absence of interest revenue,

Islamic banks will charge high fees and commission, which should make the non-interest

revenue of Islamic banks proportionately higher.

In terms of funding, Islamic banks are allowed to obtain as much as they can from the

market, so long as it is sharia-compliant. There seems to be no difference between Islamic

and conventional banks regarding the market funding channel. However, there is a difference

in terms of loan-deposit ratios as Islamic banks do not considered PLS accounts as loans.

Also, Islamic banks rely more on lending-based activities than on investing their funds in the

non-real sector.

6
 In terms of asset quality, it seems that Islamic banks have a tendency to have more

equity nature of savings and investment deposits, which can increase the likelihood of

depositors monitoring the banks. At the same time, however, it can reduce the banks’

incentives to monitor the borrowers. In terms of efficiency, Beck, Demirgüç-Kunt, and

Merrouche (2013) argue that the higher complexity of the design of Islamic banking products

leads to lower efficiency for Islamic banks. However, the lower agency problems in Islamic
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banks also lead to lower monitoring and screening costs.

In terms of stability, Islamic banks should not face interest rate risk. Islamic banks

also not allowed to get involved in risk-trading activities, such as trading in financial

derivatives. However, the overall risk of the banks’ balance sheets will be greater as they

include equity in addition to debt risk. Operational risk also tends to be higher in Islamic

banks due to the higher cost involved in designing Islamic banking products to comply with

sharia law.

2.2. Previous Studies

Beck, Demirgüç-Kunt, and Merrouche (2013) examine the business models,

efficiency, asset quality, and stability of Islamic and conventional banks across 22 countries.

They find that the business orientation of Islamic banks is significantly different from that of

conventional banks, Islamic banks are better capitalised, have higher asset quality, and are

less cost effective. Chong and Liu (2009) find that Islamic banks are not very different from

conventional banks in terms of PLS. In Malaysia, Islamic banks are allowed to use non-PLS

modes that are permissible under sharia principles. The returns on Islamic deposits are highly

correlated to the returns on conventional deposits. Similarly, Cevik and Charap (2011) argue

that the returns on Islamic banks seem not to be very different from the returns on

conventional banks, and the differences are not statistically significant, in the case of

7
 Malaysia and Turkey. On a similar theme, Bacha (2004) states that, albeit Islamic banks are

interest-free, they are still subject to interest rate risks. As such, these findings provide an

unclear picture of the business orientation of Islamic banks.

In term of stability, Hasan and Dridi (2011) argue that the better business model of

Islamic banks helped to mitigate the impact the 2008 crisis had on their profitability. The

better credit and asset quality of Islamic banks thus lead to financial stability. Čihák and
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Hesse (2010) find that Islamic banks are more stable than conventional banks in 18 financial

banking systems. Also, they find, small Islamic banks are stronger than large Islamic banks

and small commercial banks. Parashar and Venkatesh (2010) find that Islamic banks are

vulnerable to periods of crisis, suffering in terms of capital ratio and return on equity, while

the conventional banks took a hit in terms of liquidity and ROA in the recent crisis.

Pertaining to efficiency, Yudistira (2004) concludes that in most cases Islamic banks

are more efficient than conventional banks. Small and medium Islamic banks are less

efficient and should be encouraged to merge to make use of economies of scale. He also

reports that Islamic banks in the Middle East are less efficient than those outside of the

region. In contrast, Sufian (2009) states that Middle Eastern and North African (MENA)

Islamic banks have higher technical efficiency than do Asian Islamic banks. Srairi (2009)

reports that banks in the Gulf Cooperation Council countries are more efficient at generating

profits than controlling costs. In addition, their higher capital asset ratios and loan-to-deposit

ratios lead to lower costs. Moreover, Said (2013) reports that both credit risk and operational

risk are negatively correlated with efficiency in Islamic banks in the MENA region. In the

Indonesian case, Firdaus and Hosen (2013) find that Islamic banks in Indonesia do not reach

an optimal level of efficiency.

3. DATA AND METHODOLOGY

8
 3.1. Data

All data used to construct the indicators for efficiency, asset quality, business

orientation, and stability were retrieved from the Bankscope database. We consider 48

Indonesian banks, of which 37 are conventional and 11 Islamic. Our dataset spans from 2008

to 2012.

The main reason we use the five-year period starting in the year 2008 is because
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generally the data for Islamic banks in Indonesia provided by Bankscope start in the year

2008 while the data for conventional banks are mostly available from the 1990s onwards. If

we took the cut-off point for this study before the year 2008, in most cases we would not be

able to obtain observations for Islamic banks, which would reduce the information content for

the Islamic banks.

This study uses a set of variables to compare Islamic and conventional banks in

Indonesia, namely, asset quality (loans-to-deposit ratio), business model (fee income, non-

deposit funding), and stability (ROA, equity-to-assets ratio, and Z-score)1. We control other

variables that could affect the results. Particularly, we use the log of total assets to control for

1
Although the descriptive statistics and univariate comparisons between the conventional and Islamic banks
show significant differences between the two, one might argue that these differences could be affected by bank-
specific characteristics. We propose a panel ordinary least square (OLS) regression to assess the differences in
the business model, asset quality, stability, and efficiency. Panel data is used in assessing the differences in the
business model, efficiency, asset quality, and stability. In the panel data model, the model consists of n cross-
sectional units, denoted n = 1,…, N, that are observed at each of T time periods, t = 1,…, T. Therefore, the total
observations are n x T. The model enables us to keep the same objects (entities) and to measure them over the
time. Econometrically speaking, the basic form of panel data according to Brooks (2008) can be written in the
equation below.

y = β + β X  +ε
Where yi,t is the dependent variable, X  is a 1 x k vector of observations on the explanatory variable, β is the
intercept term, β is a k x 1 vector of coefficients to be estimated on the explanatory variables, and ε is the error
term. . Accordingly, the functional form used in this study is as follows:

Bank  = β + β X  +β I + ε

Where Bank is the proxy for the business model, asset quality, and stability of bank i in year t. B is a vector of
time-varying the bank characteristics, I is a dummy taking the value of one for the Islamic banks, and ε is the
error term.

9
 bank size (Beck, Demirgüç-Kunt, and Merrouche 2013), and we include the fixed assets to

total assets ratio to control for the opportunity costs that may arise from the non-lending

business of banks (Beck, Demirgüç-Kunt, and Merrouche 2013; Demirgüç-Kunt and

Huizinga 2010). Table 2 below depicts the variables used in this research and their sources.

<Insert Table 2 here>

3.1.1. Business model

The banks’ business models are compared using the share of fee-based business to
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total operating income, non-deposit funding to total funding, and the loan-deposit ratio (Beck,

Demirgüç-Kunt, and Merrouche 2013; Demirgüç-Kunt and Huizinga 2010). The fee-income

ratio is computed as net fees and commission divided by total operating income.

3.1.2. Asset quality

We use the ratios of loss reserves, loan-loss provision, and non-performing loans as

proxies for asset quality (Beck, Demirgüç-Kunt, and Merrouche 2013). The ratios are scaled

based on gross loans. Beck, Demirgüç-Kunt, and Merrouche state that, regarding the

difference in asset quality between Islamic and conventional banks, it is not clear whether

equity funding in Islamic banks gives an incentive to monitor the risk of debtors.

3.1.3. Stability

We employ several stability variables, such as the return on assets (ROA), the equity

to total assets ratio, and the Z-score. The Z-score is a widely used proxy for bank stability

(Beck, Demirgüç-Kunt, and Merrouche, 2013), which reflects the distance from insolvency.

The bank stability is higher when the Z-score is higher. Its formula is

 +  
=
(1)


Islamic banks are assumed to be more stable than conventional banks as they do not

get involved in risky trading activities. Also, interest rate risk should be absent from Islamic

10
 banks. However, Islamic banks are prone to higher operational risk because of the complexity

of sharia-compliant products (Beck, Demirgüç-Kunt, and Merrouche, 2013).

3.1.4. Efficiency

The measurement of inputs and outputs remains important for the researcher. In this

regard, as is typical in research on the banking sector, following Said (2012) and Rosman,

Abd, and Zainol (2014), two outputs (loans and non-interest income) and three inputs (total
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deposits, personnel expenses, and fixed assets) are employed in this study to examine the

efficiency of Islamic and conventional banks in Indonesia.

<Insert Table 3 here>

3.2. Methodology

3.2.1. Pooled OLS

Panel data cover information across both time and space. Such data enable us to keep

the same objects (entities) and measure them over the time. Econometrically speaking, the

basic form of panel data can be written as follows:

 = β + β  + (2)

where  = µi + λt + νit

and where

i denotes the cross-sectional dimension for households, firm, countries, etc

t denotes the time-series dimension,
yi,t is the dependent variable,
β is the intercept term,
β is a k x 1 vector of coefficients to be estimated on the explanatory variables, and
 is a 1 x k vector of observations on the explanatory variables (Brooks, 2008).

In terms of the data estimation, first, we estimate the equation using the pooled

ordinary least squares (pooled OLS) approach. In pooled OLS, the panel data should not

11
 contain any individual effects if the method is to produce efficient and consistent parameter

estimation. If the individual effects are not equal to zero, the assumption of exogeneity – that

is, that the error terms are not correlated with any of the regressors – might be violated. The

violation of this assumption would render the random-effect estimators biased. Thus, the OLS

would no longer be the best linear unbiased estimator (BLUE). Specifically, the assumptions

of OLS can be expressed as follows:

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1. The average value of the error term is zero; E(µt) = 0.

2. The error terms have constant variance (homoscedasticity); var (µt) = σ2 < ∞.

3. The covariance between the error terms over time is zero, or the error terms are not correlated

to each other (no autocorrelation); cov (µi ,µj) = 0 for i ≠ j.

4. The independent variables (xt) are non-stochastic, provided that the error terms are not

correlated with any regressors; cov (µt ,xt) = 0.

5. The error terms are normally distributed; µt ≈ N(0, σ2).

3.2.2. DEA

DEA is used to measure the efficiency of each decision-making unit (DMU) in a way

that provides the maximum ratio of the proportion of outputs to the proportion of inputs. Put

simply, this indicates that the more outputs are produced from the given inputs, the more

efficient is the production. The efficiency provides an opportunity for multiple outputs and

inputs to be measured without pre-assigned weights being required. The advantage of DEA is

that it requires less data and can work with a small sample size. Due to our small sample of

48 banks, we employ this methodology to test the efficiency of Islamic and conventional

banks in Indonesia. The DEA can be described as in equation (3) below:

12
 i = 1,…,m, j = 1,….,n (3)

Where hs is technical efficiency for the bank s, i is output, j is input, m is the total number of

outputs, n is the total number of inputs, µis is output weight, yis is input weight, µjs is the

amount of output i produced by the bank s, and yjs is amount of input j used by bank s.
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Banker, Charnes, and Cooper (1984) introduced the BCC model to assess the

efficiency of a DMU as indicated by variable returns to scale (VRS). The VRS allows us to

measure the pure technical efficiency, which denotes the technical efficiency devoid of the

scale efficiency effects. The existence of scale efficiency is indicated by the gap between the

technical efficiency and pure technical efficiency scores of a particular DMU. Specifically,

the input-DEA model with regard to VRS can be written as follows:

Min φ, λ, φ
Subject to – φyi, + Yλ ≥ 0
xi – Xλ ≥ 0
N1 ‘λ =1
And λ ≥ 0 (4)

Where λ is an N x 1 intensity vector of constants and φ is a scalar (1 ≥ φ ≤ ∞). N1 is and N x

1 vector of ones. For N number of firms, Xi is (m x n) matrix and Yi is (k x n) matrix.

Specifically, matrix (m x n) and matrix (k x n) can be written as follows:

  … "
 … $
X= (5)
  "
# # … #"

  … "

  … " $
Y= (6)
% % … %"

13
 4. FINDINGS AND DISCUSSION

4.1. Descriptive Statistics

Table 4 below reports the descriptive statistics of the variables measuring the banks’

business model, asset quality, stability, and efficiency. We also compare the Islamic banks

and conventional banks.

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First, we compare the business models of Islamic and conventional banks in

Indonesia. The fee-income ratio swings from -4.67% to 40.01% with an average of 10.91%.

The non-deposit funding to total funding ratio varies from 0% to 100% with a mean of

25.82%. The loans-to-deposits ratio ranges from 39.6% to 999% with an average of 118.78%.

In all cases, Islamic banks have higher levels of business model indicators than do

conventional banks. As indicated by Beck, Demirgüç-Kunt, and Merrouche (2013), our

findings confirm that Islamic banks in Indonesia rely on fee-based income, have a significant

portion of non-deposit funding, and have greater loans-to-deposit ratios than conventional

banks. Our t-test results clearly demonstrate that there is a significant difference between

Islamic and conventional banks in Indonesia in terms of our three indicators of business

model. This indicates that Islamic banks in Indonesia do not follow the conventional business

model that mainly involves interest income and deposit funding.

<Insert Table 4 here>

Secondly, we compare the asset quality of Islamic banks and conventional banks by

using the loan-loss reserves, loan-loss provisions, and non-performing loans. Loan-loss

reserves vary from 0.06% to 47%. Loan-loss provisions swing from less than 0 to 202%.

Non-performing loans range from 0.24 to 100%. In this regards, Islamic banks have lower

levels of loan-loss reserves and non-performing loans than conventional banks. However, the

share of loss provisions of Islamic banks is close to that of their conventional counterparts.

14
 Thirdly, we employ three indicators to measure bank stability, namely the Z-score, the

ROA, and the equity to total assets ratio. The Z-score indicates that the variability of the bank

return has to decrease below the expected value for the bank to become insolvent (De Nicolo

2000). A higher level of Z-score indicates a higher level of bank stability. We report that the

Z-score ranges from below 0 to 314, with a mean of 63. Islamic banks exhibit higher Z-scores

than conventional banks, indicating that Islamic banks in Indonesia are more stable than
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conventional banks. The higher capitalisation of Islamic banks, as indicated by the higher

equity to assets ratio, contributes to their greater stability compared to conventional banks in

Indonesia. The difference between the stability of the Islamic and conventional banks is

statistically significant. Also, the ROA swings from -9% to 4%, with an average of 1.4%,

while the equity to total assets ratio ranges from -3 to 54% with a mean of 12% during the

studied period. The return for Islamic banks is lower than that for conventional banks. Albeit

the Islamic banks in Indonesia are more stable, they are less profitable than conventional

banks.

Lastly, controlling for other variables that might affect the results, we employ log

total assets to control for the bank size (Beck, Demirgüç-Kunt, and Merrouche 2013), and the

fixed assets to total assets ratio to control for the opportunity costs that could arise from non-

lending activities (Beck, Demirgüç-Kunt, and Merrouche 2013; Demirguc-Kunt and

Huizinga 2010). In our research, total assets range from 91 million USD to 6,700 billion

USD, with an average of 195 billion USD. The fixed assets to total assets ratio varies from 0

to 8.3% with a mean of 1.5%. Islamic banks in Indonesia have significantly lower total assets

than conventional banks, yet they have higher fixed assets.

4.2. Regression Results: Islamic Banks vs. Conventional Banks

15
 Table 5 below shows the regression results for several indicators of business model,

asset quality, and stability, for Islamic and conventional banks in Indonesia.

<Insert Table 5 here>

According to the results, we find that Islamic banks in Indonesia have higher non-

deposit funding (by 51.81%), higher loans-to-deposit ratios (more than twice the level), and

higher equity to assets ratios (2.7% higher) than conventional banks. In terms of business

model, Islamic banks in Indonesia rely on non-deposit funding, unlike their conventional
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counterparts that make use of interest income and deposit funding. The loans-to-deposits

ratios of Islamic banks differ significantly from those of conventional banks. This result

indicates the differences in business models between Islamic and conventional banks in

Indonesia.

In terms of asset quality, Islamic banks in Indonesia have lower levels of loan-loss

provisions and non-performing loans than conventional banks but the differences are not

statistically significant. Nonetheless, the lower levels of non-performing loans and loan-loss

provisions indicate the better asset quality of Islamic banks. Our findings regarding the asset

quality of Islamic and conventional banks confirm the study findings of Beck, Demirgüç-

Kunt, and Merrouche (2013) and Farooq, Moazzam, and Zaheer (2010).

Next, Islamic banks appear to have greater stability than conventional banks as

indicated by higher Z-scores. However, Islamic banks generate lower returns than

conventional banks. Our findings endorse the findings of Beck, Demirgüç-Kunt, and

Merrouche (2013), who find a similar pattern of lower returns for Islamic banks. Although

Islamic banks have lower yields, they have higher capitalisation than conventional banks, as

indicated by their significantly higher equity to total assets ratios.

4.3. Regression Results: Islamic vs. Conventional Banks Including Control Variables

16
 Table 6 below reports the results of the comparison of business models, asset quality,

and stability, with controls for loans to total assets and the share of fixed assets to total assets.

The results confirm the findings in table 5. Islamic banks in Indonesia have 36% higher non-

deposit funding, more than twice the loans-to-deposits ratios, 15% higher Z-scores, and 4%

higher capital asset ratios than conventional banks. Moreover, the differences between the

two groups are statistically significant. Islamic banks also have lower loss reserves and lower
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loss provisions than conventional banks. However, here the differences are not statistically

significant.

<Insert Table 6 here>

In terms of the size of the banks, the larger banks have higher fee-income, higher non-

deposit funding, higher loss reserves, higher loss provisions, higher non-performing loans,

lower Z-scores, and lower capital asset ratios. These findings indicate that the larger banks

rely slightly on fee-income and non-deposit funding in their business models. However, the

asset quality is low, as indicated by the higher loss reserves and loss provisions, and these

banks are less stable. They have lower Z-scores due to lower ROAs. Also, banks with higher

fixed assets have higher loss reserves, higher loss provisions, and higher non-performing

loans. This implies that banks with higher fixed assets have lower asset quality and lower

yields.

4.4. Regression Results: Islamic Banks vs. Conventional Banks Split by Size

In this study, we also investigate whether the size of a bank explains its business

model, asset quality, and bank stability. We disaggregate the sample into three subsamples:

large, medium, and small. The first group includes banks above the 75th percentile. Their

assets are greater than 18,100 million USD. The medium-sized banks fall between the 25th

and 75th percentiles and their assets range from 3,500 to 18,100 million USD. The small

17
 banks are those below the 25th percentile, with assets of below 1,500 million USD. Table 7

below shows the results for the different size groups with regards to the comparison of

business model, asset quality, and bank stability between Islamic and conventional banks.

<Insert Table 7 here>

From the results, we observe that larger Islamic banks have higher non-deposit

funding and higher loans-to-deposit ratios. They also have lower loss reserves, higher Z-

scores, and higher capital asset ratios. The medium-sized Islamic banks also have higher fee-
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income, and higher loans-to-deposit ratios, but they have lower non-deposit funding. They

also have lower loss provisions. In this sense, there is no difference between medium-sized

Islamic and conventional banks. Here, we find support for the findings of Beck, Demirgüç-

Kunt, and Merrouche (2013). The small Islamic banks also exhibit higher loans-to-deposit

ratios. Interestingly, in all size groups, the Islamic banks generate lower returns albeit not

statistically significantly so. They also have better asset quality as indicated by the lower

level of loss provisions.

The large Islamic banks are more stable than the mid-sized and small Islamic banks.

In this regard, our findings are different from those of Beck, Demirgüç-Kunt, and Merrouche

(2013), who find that small Islamic banks are more stable than large Islamic banks. We also

notice several other differences between the large and small Islamic banks. The large Islamic

banks have lower loss reserves and higher Z-scores than the small Islamic banks. The better

stability of the large Islamic banks is, perhaps, partly due to their better asset quality and

higher capitalisation than those of the small Islamic banks. Another reason, perhaps, is that

small Islamic banks may face higher costs in designing sharia-compliant products and from

the absence of risk diversification (Čihák and Hesse, 2010).

4.5 Descriptive Statistics for Bank Efficiency

18
 The next step of our study is to compare the bank efficiency of Islamic and

conventional banks. To do, we use DEA. We include two outputs and three inputs to explain

efficiency. The outputs are loans and non-interest income, while the inputs are total deposits,

personnel expenses, and fixed assets (Said 2012; Rosman, Abd, and Zainol 2014). Table 8

below reports the descriptive statistics for the outputs and inputs.

<Insert Table 8 here>

Over the study period, it is apparent that Islamic banks have more loans than
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conventional banks. Islamic banks have total loans averaging 128,925 million USD while

those of conventional banks average 100,463 million USD, which is a 28% difference. In

terms of the input variables, conventional banks have more deposits (typically twice the

amount) than Islamic banks. Conventional banks also have higher fixed assets and personnel

expenses than Islamic banks over the study horizon.

The growth in financing of Islamic banks (loans in conventional banks) in the year

2010-2012 provides an indication of the positive performance of Islamic banks in their

intermediary function. We could say Islamic banks are relatively better at channeling their

funds than conventional banks. The higher financing-to-deposit ratio (FDR) of Islamic banks

reflects the contribution of Islamic banks to the real sector. The contribution of Islamic banks

in the Indonesian economy has increased gradually as indicated by the growth of the total

financing. It seems that Islamic banks were more stable and performed better than

conventional banks during the financial crisis. This is not surprising as Islamic banks are less

risky than conventional banks (Cihak and Hesse, 2010).

4.6 Efficiency Scores for Islamic Banks and Conventional Banks

Figure 2 below depicts the efficiency patterns for Islamic and conventional banks in

Indonesia. It shows that the OTE of conventional banks experiences a peak in 2009 and

gradually declines in 2010 and 2011. Islamic banks are more efficient as indicated by their

19
 OTE, which reaches its peak in 2008 and 2009. While the OTE score of the Islamic banks has

declined in subsequent years, their overall efficiency is still higher than that of conventional

banks. The higher efficiency scores of the Islamic banks are confirmed in table 9.

<Insert Figure 2 here>

Specifically, according to table 9, the overall efficiency of the conventional banks

exhibits a declining pattern from 2009 to 2011. However, their performance gradually

increases in 2012. This is also true for the technical efficiency and SE of the conventional
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banks, which exhibit the same sort of movement. During the same period, the technical

efficiency of the conventional banks swings from 0.87 in 2008 to 0.82 in 2012. In terms of

SE, to some extent the conventional banks show a stable pattern in 2009-2011, but it starts to

decline in 2012.

In contrast, unlike conventional banks, Islamic banks perform well in terms of overall

efficiency, technical efficiency, and SE from 2008 to 2012. Islamic banks show the highest

and most stable overall efficiency in 2008-2009. Interestingly, the performance of the Islamic

banks is not affected by the crisis, particularly in 2008 and 2009 when many conventional

banks were being affected (Parashar and Venkatesh 2010). One reason is that the structure of

Islamic banking products is essentially asset-backed financing, making Islamic banks safer

than conventional banks. Another reason is that Islamic banks are better capitalised than

conventional banks (Beck, Demirgüç-Kunt, and Merrouche 2013).

<Insert Table 9 here>

The overall efficiency of the Islamic banks does exhibit a declining pattern after 2009,

before starting to increase again in 2012. Nonetheless, in all cases, the overall efficiency of

the Islamic banks remains higher than that of the conventional banks from 2008 to 2012.

Similarly, the technical efficiency and SE of the Islamic banks demonstrate better

performance than for the conventional banks.

20
 The efficiency score in table 9 suggests that the overall efficiency of conventional

banks in Indonesia was unstable during the period under study from 2008-2010. Indonesian

conventional banks attained the highest mean efficiency score of 0.78 in 2009 and then the

score declines gradually to 0.64 in 2010. The decomposition of the overall efficiency into

pure technical and scale efficiency components indicates that the technical inefficiency

dominates the scale inefficiency of Islamic banks in Indonesia. This implies that during the
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period of study, Islamic banks in Indonesia performed at a slightly higher scale efficiency but

lower scale of technical efficiency. In contrast, conventional banks are likely to have more

scale inefficiency than technical inefficiency - conventional banks in Indonesia operate at

higher technical efficiency but at lower scale efficient. Overall, the Islamic banks appear to

be relatively more efficient, as indicated by higher overall efficiency, technical efficiency,

and SE.

4.7. Determinants of Islamic and Conventional Banks’ Efficiency

To test and compare the determinants of efficiency for Islamic and conventional

banks, we employ panel regression on OTE, PTE, and SE. Following the work of Yudistira

(2004) and Rosman, Abd, and Zainol (2014), we use profitability (ROA), size (log of total

assets; lnTA), capitalisation (equity to total assets ratio; EQTA), and credit risk (loan-loss

provisions; Prov) as the determinants of efficiency. Table 10 below shows the regression

summary for OTE, PTE, and SE for conventional and Islamic banks in Indonesia.

<Insert Table 10 here>

The results indicate that profitability has a significantly positive effect on the overall

efficiency and SE of the conventional banks. Sufian (2008) states that banks become more

efficient as they increase their profitability. Size has a significantly negative relationship with

SE for the conventional banks. Rosman, Abd, and Zainol (2014) argue that the negative

effect is due to the banks operating at decreasing returns to scale. In contrast, size has a

21
 significantly positive relationship with PTE. The larger banks are more efficient in converting

their inputs into outputs. Next, capitalisation has a significantly positive relationship with

PTE (Sufian, 2009). As the banks use more equity, they become more efficient (Sufian,

2009). However, capitalisation has a negative relationship with SE. Lastly, credit risk has a

significantly negative effect on PTE, but a significantly positive effect on SE. The positive

effect is partly due to the banks being more prudent in their financing activities.
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For the Islamic banks, interestingly, the results show that profitability, size,

capitalisation, and provisions are not statistically significant in determining the efficiency of

Islamic banks in Indonesia. Our results are similar to those of Yudistira (2004). The size of

Islamic banks has a negative relationship with OTE, PTE, and SE, albeit not a statistically

significant one. As mentioned before in relation to conventional banks, this is partly because

the Islamic banks are operating at decreasing returns to scale (Rosman, Abd, and Zainol

2014). Capitalisation has a positive effect on overall efficiency but not a statistically

significant one. Credit risk, too, is positively but not significantly related to overall

efficiency.

5. Conclusion

We investigate how Islamic banks in Indonesia differ from conventional banks in

terms of business model, asset quality, stability, and efficiency. Our findings suggest that

there is a significant difference in terms of the business models used by Islamic and

conventional banks. Islamic banks in Indonesia rely on non-deposit funding, unlike their

conventional counterparts that use interest income and deposit funding. Islamic banks also

have better asset quality than conventional banks. Islamic banks have lower levels of loan-

loss provisions and non-performing loans. Islamic banks appear to have greater stability than

conventional banks as indicated by their higher Z-scores. However, Islamic banks generate

22
 lower returns than conventional banks. In terms of size, large Islamic banks are more stable

than mid-sized and small Islamic banks. Islamic banks appear to be relatively more efficient,

as indicated by higher overall efficiency, technical efficiency, and scale efficiency.

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23
 Figure 1.
Total Assets of Islamic Banks in Indonesia

Total Asset of Islamic Banking

120 250,000
100 Total Aset
200,000

Billion IDR
Growth
80
150,000
60
%

100,000
40
20 50,000
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0 0
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05

Jul-06
Dec-06
May-07
Oct-07

Aug-08
Jan-09
Jun-09
Nov-09
Apr-10

Jul-11
Dec-11
May-12
Oct-12
Mar-03

Sep-05
Feb-06

Mar-08

Sep-10
Feb-11

Mar-13
Notes:
The figure shows the development of total assets and the growth of Islamic banks in Indonesia. The total assets
of Islamic banks are equal to the total size of Islamic banking, based on either full-fledged, window, or rural
Islamic banks, in Indonesia. The growth is the percentage change in the total assets of Islamic banks.

24
 Figure 2.
Overall Technical Efficiency, Pure Technical Efficiency, and Scale Efficiency: Islamic Banks vs
Conventional Banks in Indonesia, 2008-2012

Panel A. Conventional Banks Panel B. Islamic Banks

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Notes:
This figure compares OTE, PTE, and SE over time between Islamic and conventional banks in Indonesia. OTE
is banks’ overall technical efficiency, which is derived by employing the CCR model. PTE is pure technical
efficiency, which relates to the ability of the managers to utilise the banks’ existing resources. SE is scale
efficiency, which reflects the exploiting of scale economies by operating at a point at which the production
frontier exhibits CRS (constant returns to scale). SE can be determined by dividing OTE by PTE (i.e
SE=OTE/PTE).

25
 Table 1.
Total Assets of Islamic Banks in Indonesia (Top 10 Islamic Banks), 2012

No Name Total Assets Share of Share of

(Rp trillion) National Islamic Banks’ Assets
Banking Assets (%)
(%)
1 Bank Syariah Mandiri 54.2 1.3 27.8
2 Bank Muamalat 44.9 1.1 23.0
3 BRI Syariah 14.1 0.3 7.2
4 BNI Syariah 10.7 0.3 5.5
5 Mega Syariah 8.2 0.2 4.2
6 BTN- Sharia Business Unit 7.7 0.2 3.9
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7 Permata- Sharia Business Unit 10.7 0.3 5.5

8 CIMB Niaga- Sharia Business Unit 9.1 0.2 4.5
9 Maybank Syariah 2.1 0.1 1.1
10 Danamon- Sharia Business Unit 2.0 0.1 1.0
Total (Top 10) 163.7 2.6 83.9

Notes:
This table shows the top 10 Islamic banks in Indonesia in terms of total assets. Total assets is the total value of
the banks’ asset in terms of Trillion Rupiah. Share of national banking assets is the individual bank’s total assets
divided by total national banking assets. Share of Islamic banks’ assets is the individual bank’s total assets
divided by the total value of Islamic banks as a whole.

26
 Table 2.
Variables and Sources of Data
No Variables Symbol Indicators for
1 Fee income FEE Business Model
2 Non-deposit funding NON_DF Business Model
3 Loans-to-deposits ratio LDR Business Model
4 Loss reserves LOSSRES Asset Quality
5 Loan-loss provisions LOSSPROV Asset Quality
6 Non-performing loans NPL Asset Quality
7 ROA ROA Stability
8 Equity to assets ratio EQTA Stability
9 Z-score Z Stability
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Control Variables
1 Ln(total assets) LN_TA Control Variables
2 Fixed assets to total asset FIX_TA Control Variables
Notes:
This table contains a set of variables used to compare Islamic and conventional banks in Indonesia. To explain
the business model, we use fee income, non-deposit funding, and loans-to-deposits ratio. FEE is derived by
dividing the net fees and commission by the operating income. Non_DF is computed by dividing other funding
by total funding. LDR is provided by Bankscope. To explain asset quality, we use loss reserves, loan-loss
provisions, and non-performing loans. All data for LOSSRES, LOSSPROV, and NPL are provided by
Bankscope. To measure the stability, we use the return on assets (ROA), equity-to-assets ratio (EQTA) and Z-
score. ROA can be derived by dividing the bank income by total assets. EQTA is the capital asset ratio, which
can be computed by dividing the total equity by the total assets. The Z-score is a measure of banks’ stability. Z
is computed using the formula (ROA+CAR)/Sd(CAR), where CAR is the capital asset ratio. We also include
ln(total assets) and the fixed assets ratio as our control variables that might affect our estimation. LN_TA is used
to control the bank size. FIX_TA is employed to control the opportunity cost of having non-earning assets on
the balance sheet.

27
 Table 3.
Outputs and Inputs Specification for DEA
No Variables Symbol
Outputs
1 Loans LOAN
2 Non-interest income NII

Inputs
1 Total deposits DEP
2 Personnel expenses EXP
3 Fixed assets FIX
Notes:
This table shows the variables used as outputs and inputs in the efficiency study. The outputs exhibit the
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services provided to customers and are measured by the number and type of transactions over a period of time.
The inputs include the physical variables, i.e. labour and material, and any associated costs, used to perform
transactions and deliver services to the customers.

28
 Table 4.
Descriptive Statistics of Variables: Bank Business Model, Asset Quality, and Stability

Variables Scaled By Number of Mean Std.Dev Min Max Islamic Conventional Difference t-test
observations Banks Banks p-value
Fee-income (%) Total Operating 192 10.91 8.49 -4.67 40.01 13.69 10.62*** 0.00
Income
Non-deposit Funding (%) Total Funding 39 25.83 37.30 0.20 100.00 56.39 4.57*** 0.00
Loans-deposits ratio (%) 207 118.79 132.68 39.60 999.33 337.37 86.00*** 0.00

Loan-loss reserves (%) Total Gross Loans 210 2.65 3.69 0.07 47.57 2.05 2.75** 0.02
Loan-loss provisions (%) Total Gross Loans 193 14.41 24.49 -55.12 202.60 14.04 14.48 0.82
Non-performing loans (%) Total Gross Loans 89 5.65 15.69 0.24 100.00 3.81 5.79 0.27

Return on Assets (%) 212 1.47 1.38 -9.25 4.54 1.11 1.54*** 0.00
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Equity Asset ratio (%) 213 12.31 6.94 -3.28 53.78 14.59 11.89*** 0.00
Z-score 189 62.78 46.44 -0.33 314.48 71.20 61.25*** 0.01

Control Variables:
ln(Total Assets) 213 8.81 2.30 4.52 15.72 10.03 8.58*** 0.00
Fixed Assets (%) Total Assets 213 1.52 1.30 0.03 8.35 1.57 1.51 0.56

Notes:
This table contains the descriptive statistics for the variables used in this research. Overall, Islamic banks have
higher scores for the business model proxies than do conventional banks. In terms of asset quality, Islamic banks
have lower levels of loan-loss reserves and non-performing loans. In terms of stability, Islamic banks are more
stable than conventional banks as shown by their higher Z-scores. In terms of the control variables, Islamic
banks have lower total assets, but higher fixed assets. ***, **, and * denote significance at 1%, 5%, and 10%
respectively.

29
 Table 5.
Regression Results for Business Model, Asset Quality, and Stability: Islamic vs Conventional Banks

Variables Business Model Asset Quality Stability

Fee Non- Loans Loss Loan loss Non- Z-score ROA Equity to
Income deposit deposit Reserves provisions performing assets
funding ratio loans ratio
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Islamic Bank Dummy 3.07 51.82 *** 251.37*** -0.70 -0.44 -1.97 9.96 -0.43 2.70**
(2.10) (8.88) (21.09) (0.72) (5.01) (6.66) (9.37) (0.26) (1.30)

Constant 10.62 4.57 86.00 2.75 14.48 5.79 61.25 1.54 11.89
(0.64) (5.68) (7.62) (0.27) (1.91) (1.73) (3.67) (0.10) (0.51)
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Obs 192.00 39.00 207.00 210.00 193.00 89.00 189.00 212.00 213.00
R-squared 0.01 0.48 0.41 0.00 0.00 0.00 0.01 0.01 0.02

Notes:
This table exhibits the regression results for a set of indicators of business model, asset quality, and stability, for
Islamic banks and conventional banks in Indonesia. ***, **, and * denote significance at 1%, 5%, and 10%
respectively.

30
 Table 6.
Regression Results for Business Model, Asset Quality, and Stability: Islamic vs Conventional Banks
– Control Variables
Variables Business Model Asset Quality Stability
Fee Non- Loans Loss Loan loss Non- Z-score ROA Equity to
Income deposit deposit Reserves provisions performing assets
funding ratio loans ratio
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Islamic Bank Dummy 3.03 36.05*** 248.20*** -1.01 -6.29 2.19 15.80* -0.35 4.27***
(2.03) (7.23) (21.50) (0.65) (4.68) (5.93) (9.11) (0.21) (1.25)

ln(total assets) 1.00*** 1.48*** 1.58 0.49*** 3.35*** 2.98*** -5.98*** -0.04 -1.08***
(0.28) (1.48) (3.26) (0.10) (0.71) (0.63) (1.42) (0.03) (0.20)
Fixed assets (%) -0.77 3.99 -6.04 1.03*** 5.07*** 1.60* 1.97 -0.61*** -0.04
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(0.45) (2.57) (5.91) (0.18) (1.20) (0.92) (2.42) (0.05) (0.34)

Constant 3.18 -57.53 81.55 -3.07 -22.37*** -22.98*** 109.97*** 2.78*** 21.24***
(2.53) (12.49) (29.95) (0.94) (6.50) -5.82 (12.83) (0.31) (1.80)
Obs 192.00 39.00 207.00 210.00 193.00 89.00 189.00 212.00 213.00
R-squared 0.08 0.72 0.41 0.22 0.19 0.24 0.09 0.36 0.14

Notes:
This table contains the regression results for the business model, asset quality, and stability including the control
variables of ln (total assets) and fixed assets to total assets. The Islamic banks have higher non-deposit funding,
loans-to-deposits ratios, loan-loss reserves, Z-scores, and equity to assets ratios. ***, **, and * denote
significance at 1%, 5%, and 10% respectively.

31
 Table 7.
Regression Results for Business Model, Asset Quality, and Stability: Islamic vs Conventional Banks –
Sample Split by Bank Size

Variables Business Model Asset Quality Stability

Fee Non- Loans Loss Loan loss Non- Z-score ROA Equity to
Income deposit deposit Reserves provisions performing assets
funding ratio loans ratio
(1) (2) (3) (4) (5) (6) (7) (8) (9)
[1] Large Size* -7.56 88.09*** 344.72*** -4.43** -14.54 0.00 23.36** -0.25 6.93***
Islamic Bank Dummy (4.47) (6.35) (51.18) (2.05) (12.90) (10.70) (0.65) (1.82)

[2] Medium Size* 12.03*** -0.68** 199.04*** 0.48 -0.80 0.25 20.78 -0.21 -4.41***
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Islamic Bank Dummy (3.34) (0.22) (36.46) (0.40) (4.26) (0.78) (19.62) (0.30) (1.32)

[3] Small Size* -0.26 12.88 212.42*** 0.12 -8.08 1.98 -1.38 -0.49 5.50
Islamic Bank Dummy (-4.19) (9.58) (33.11) (0.45) (5.61) (1.90) (24.41) (0.48) (3.88)

Notes:
This table shows the comparison of business model, asset quality, and stability in term of the Islamic banks’
size. The large size group contains banks above the 75th percentile, with assets above 18,100 million USD. The
medium size group contains banks between the 25th and 75th percentile, with assets ranging from 3,500 to
18,100 million USD. The small size group contains banks below the 25th percentile with assets below 1,500
million USD. ***, **, and * denote significance at 1%, 5%, and 10% respectively.

32
 Table 8.
Descriptive Statistics for Outputs and Inputs (million USD), 2008-2012
Conventional Bank Islamic Banks
Mean Std Dev Min Max Mean Std Dev Min Max
Outputs
2008
Loans 62838.69 309496.50 43.85 1830202.00 995.07 68.62 946.55 1043.59
Non-interest income 3809.83 16668.88 1.12 95584.02 11.48 16.24 0.00 22.97
2009
Loans 61873.22 294715.90 96.67 1781610.00 34385.69 66714.90 267.46 134454.50
Non-interest income 3947.74 15910.24 4.14 91172.98 251.02 400.66 0.21 713.10
2010
Loans 91281.80 458177.20 171.50 2741965.00 111569.90 166304.80 602.35 376362.40
Non-interest income 3348.71 11669.03 2.22 61088.98 301.89 348.39 55.54 548.24
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2011
Loans 129018.40 584967.40 191.97 3472956.00 131296.40 169855.50 110.90 442213.20
Non-interest income 3808.68 13771.42 3.21 78066.50 181.97 333.82 1.38 682.44
2012
Loans 157334.10 695054.50 290.93 4107787.00 192200.00 237104.90 141.89 628482.40
Non-interest income 3451.20 12202.78 3.67 68427.72 573.89 793.82 12.57 1135.20

Inputs
2008
Total Deposits 109728.60 530313.20 63.07 3123217.00 1167.83 296.99 957.83 1377.84
Personnel expenses 2380.06 12763.47 2.10 75655.71 20.07 9.63 13.26 26.87
Fixed assets 1438.59 5052.66 2.31 25752.33 12.85 6.63 8.16 17.54
2009
Total Deposits 111513.00 517539.80 139.49 3094893.00 47330.21 92132.43 229.00 185524.00
Personnel expenses 2744.55 14801.28 2.12 88973.94 547.36 1045.96 9.85 2116.17
Fixed assets 1562.19 5362.85 2.21 26454.57 1007.84 1982.20 7.30 3981.17
2010
Total Deposits 141731.70 634763.00 186.60 3701715.00 44768.44 96006.00 641.56 216500.60
Personnel expenses 3229.29 16802.72 3.75 100959.90 2636.35 3842.91 23.78 8595.26
Fixed assets 1615.46 5277.58 1.12 24420.75 1519.46 2197.64 10.27 4893.12
2011
Total Deposits 199525.10 879971.80 255.43 5181764.00 63613.41 89405.03 63.95 257317.00
Personnel expenses 4437.07 18874.59 5.01 107462.50 6634.15 10911.30 2.07 34267.20
Fixed assets 2167.32 7492.92 0.82 38387.18 5358.96 11641.92 1.25 39663.87
2012
Total Deposits 218058.10 952510.70 420.00 5600456.00 84876.29 112775.80 52.89 330902.60
Personnel expenses 4815.56 18568.92 6.19 93978.08 8059.98 12681.40 2.48 33591.93
Fixed assets 1982.58 6731.54 2.46 33474.77 11149.76 27131.30 0.88 91879.01

Notes:
This table contains the descriptive statistics for the outputs and inputs used in this study. The outputs are
services provided to customers and are measured by the number and type of transactions over the sample period.
The inputs include the physical variables, i.e labour and material, and any associated costs, used to perform
transactions and deliver services to the customers.

33
 Table 9.
Efficiency Scores of Islamic Banks and Conventional Banks in Indonesia, 2008-2012

Bank Conventional Banks Islamic Banks

Mean Std.Dev Min Max Mean Std.Dev Min Max
Panel A: Year 2008
Overall Technical Efficiency (OTE) 0.71 0.24 0.33 1 1 0 1 1
Pure Technical Efficiency (PTE) 0.88 0.18 0.49 1 1 0 1 1
Scale Efficiency (SE) 0.82 0.21 0.33 1 1 0 1 1

Panel B: Year 2009

Overall Technical Efficiency (OTE) 0.78 0.18 0.44 1 1 0 1 1
Pure Technical Efficiency (PTE) 0.88 0.16 0.52 1 1 0 1 1
Scale Efficiency (SE) 0.89 0.14 0.51 1 1 0 1 1
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Panel C: Year 2010

Overall Technical Efficiency (OTE) 0.73 0.21 0.22 1 0.86 0.21 0.53 1
Pure Technical Efficiency (PTE) 0.83 0.20 0.37 1 1 0 1 1
Scale Efficiency (SE) 0.89 0.14 0.59 1 0.86 0.21 0.53 1

Panel D: Year 2011

Overall Technical Efficiency (OTE) 0.64 0.25 0.32 1 0.81 0.20 0.47 1
Pure Technical Efficiency (PTE) 0.79 0.23 0.39 1 0.93 0.13 0.59 1
Scale Efficiency (SE) 0.82 0.21 0.32 1 0.87 0.17 0.47 1

Panel E: Year 2012

Overall Technical Efficiency (OTE) 0.70 0.21 0.35 1 0.93 0.13 0.59 1
Pure Technical Efficiency (PTE) 0.82 0.20 0.36 1 0.99 0.02 0.94 1
Scale Efficiency (SE) 0.86 0.17 0.45 1 0.94 0.12 0.63 1

Note:
This table presents the efficiency scores of Islamic and conventional banks in Indonesia. OTE is banks’ overall
technical efficiency, which is derived by employing the CCR model. PTE is pure technical efficiency, which
relates to the ability of the managers to utilise the banks’ existing resources. SE is scale efficiency, which
reflects the exploiting of scale economies by operating at a point at which the production frontier exhibits CRS
(constant returns to scale). SE can be determined by dividing OTE by PTE (i.e SE=OTE/PTE).

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 Table 10.
Summary of Regression on OTE, PTE, SE: Islamic vs Conventional Banks

Panel A. Conventional Banks Panel B. Islamic Banks

Model 1 Model 2 Model 3 Model 1 Model 2 Model 3

OTE PTE SE OTE PTE SE
C 0.63*** 0.30*** 1.29*** 0.93*** 1.01*** 0.92***
(0.10) (0.08) (0.07) -0.12 (0.06) (0.09)
ROA 0.03*** -0.01 0.04*** -0.01 -0.04* 0.02
(0.01) (0.01) (0.01) (-0.03) (0.02) (0.02)
lnTA -0.00 0.04*** -0.04*** -0.00 -0.00 -0.00
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(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

EQTA 0.01 0.01*** -0.01*** 0.00 0.00 0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Prov 0.00 -0.00* 0.00* 0.00 0.00 0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
R-squared 0.06 0.19 0.27 0.05 0.23 0.04

Note:
This table shows the comparison of the determinants of the efficiency scores for Islamic and conventional
banks. OTE is banks’ overall technical efficiency, which is derived by employing the CCR model. PTE is pure
technical efficiency, which relates to the ability of the managers to utilise the banks’ existing resources. SE is
scale efficiency, which relates to the exploiting of scale economies by operating at a point at which the
production frontier exhibits CRS (constant returns to scale). SE can be determined by dividing OTE by PTE (i.e
SE=OTE/PTE). ***, **, and * denote significance at 1%, 5%, and 10% respectively.

35
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