Financial Performance and Bank Efficiency: Comparison Between Conventional Banks and Sharia Banks Essay

This study aims to compare the financial performance and bank efficiency between conventional banks and sharia banks in Indonesia in the period of 2008-2011 by using financial ratios to measure the financial performance, as well as SFA (Stochastic Frontier Approach) to the measure bank efficiency. Financial ratios that are used are consisted of CAR, NPL, ROA, ROE, and LDR. Meanwhile variables that are used to measure the efficiency are receivables, placements with Bank Indonesia and other banks, third-party funds, and issued capital and fully paid capital. The samples consist of 11 conventional banks and 11 sharia banks. T-test is conducted to determine whether there is any significant difference in financial performance between sharia Banks and conventional Banks. The results of hypothesis testing and multiple regression analysis indicate that there are significant differences of CAR, ROA, ROE, profit efficiency between conventional banks and sharia banks. Keywords: financial perfor mance, bank efficiency, SFA, conventional banks, sharia bank. ABSTRAK Penelitian ini bertujuan untuk melakukan perbandingan kinerja keuangan serta efisiensi Bank Umum Konvensional dan Bank Umum Sharia di Indonesia pada periode 2008-2011 dengan menggunakan rasio keuangan untuk mengukur kinerja keuangan, serta SFA (Stochastic Frontier Approach) untuk mengukur efisiensi bank. Rasio keuangan yang digunakan terdiri dari CAR, NPL, ROA, ROE, dan LDR. Sedangkan variable untuk mengukur efisiensi laba diantaranya Pembiayaan yang diberikan, Penempatan pada Bank Indonesia dan bank lainnya, Dana pihak ketiga, dan Modal yang disetor dan dibayar penuh. Sampel yang digunakan adalah 11 Bank Konvensional dan 11 Bank Sharia. Uji t dilakukan untuk mengetahu apakah terdapat perbedaan yang signifikan kinerja keuangan antara Bank Konvensional dan Bank Sharia. Hasil dari uji hipotesis dan regresi berganda tesebut menunjukkan bahwa terdapat perbedaan yang signifikan CAR, ROA, ROE, efisiensi laba diantara Bank Konvensional dan Bank Sharia. Kata kunci: kinerja keuangan, efisiensi bank, SFA, bank konvensional, bank syariah. INTRODUCTION It has been almost a quarter of century since the first sharia bank was established. Sharia banks not only have big expansion in Muslim countries, but also in Non-Muslim countries. Some people choose sharia banks because of the differences between conventional banks and sharia banks. Actually there are not many differences between them but, the main reason why people choose sharia banks is because there is no riba system like in conventional banks. In the discussion of banking in Indonesia, it is important to analyze the performance. Performance represents the condition of the bank, it represents whether the management of the bank can run the operational well or not. It is important for banks to measure their performance in order to be able to improve its service to satisfy the customers. There are several ways to assess bank’s performance. Performance evaluation is an important tool to assess the success of any business including sharia financial institution. In the performance evaluation, setting the bench mark is vital in order to make comparison between the desired and the actual performance. In 1979, the use of the CAMEL factors in evaluating a bank’s financial health has become well known among regulators. Piyu (1992) stated that financial ratios are often used to measure the overall financial sound of a bank and the quality of its management. Bank regulators, for example, use financial ratios to evaluate a bank’s performance as a part of the CAMELS system. CAMELS system consists of Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk. An overall composite CAMELS rating, which is ranging from one to five is then developed from this evaluation. As a whole, the CAMELS rating, which is determined after an on-site examination, provides a means to categorize banks based on their overall health, financial status, and management. Another important aspect in measuring performance and competition in banking industries is efficiency. Efficiency is improved by reducing cost in production process or by increasing revenue. If there is a rapid change of financial structure, we have to identify the fund efficiency and revenue. Banks which is more efficient is hoped to be able to derive maximum profit and give better service quality for costumer. One of the ways to measure the efficiency of a bank is by using parametric approach with Stochastic Frontier Approach (SFA) through alternative profit efficiency. SFA has an advantage, which is it is able to compare other measurement methods that involve disturbance term. Disturbance term is representing disturbances, measurement error and exogenous shocks beyond the control, environment variables which are easily treated, possibility to conduct hypothesis testing by using statistical test, and ease in identifying the outliers. SFA efficiency value range is between 0 and 1. If the value of SFA equals to 1, it means that the bank’s performance is efficient. Meanwhile, if the value of SFA equals to 0, it means that the bank’s performance is inefficient. Banks’ efficiency is also needed as an important indicator to analyze bank’s performance and as a tool to improve the effectiveness of monetary policy. Generally, there are 3 basic concepts of efficiency model in banking sector. They are cost efficiency, standard profit efficiency, and alternative profit efficiency. PREVIOUS RESEARCH Islamic Banks Sole (2007) on his journal entitled Introducing Islamic Banks into Conventional Banking System. From his journal, can be concluded that over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum. It has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. Banks Performance Wirnkar (2008) on his journal entitled CAMELs and Banks Performance Evaluation: The Way Forward, said that the findings revealed the inability of each factor in CAMEL to capture the wholistic performance of a bank. Also revealed, was the relative weight of importance of the factors in CAMEL which resulted to a call for a change in the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the factors in CAMEL were identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total shareholders’ fund to total risk weighted assets. The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank. Among other recommendations, banks’ regulators are called upon to revert to the best identified ratios in CAMEL when evaluating banks performance. Banks Efficiency Majid (2010) in his journal entitled Efficiency in Islamic and Conventional Banking: An International Comparison, can be concluded that he was with Saal and Battisti investigated the efficiency of a sample of Islamic and conventional banks in 10 countries that operate Islamic banking for the period 1996-2002, using an output distance function approach. They obtain measures of efficiency after allowing for environmental influences such as country macroeconomic conditions, accessibility of banking services and bank type. While these factors are assumed to directly influence the shape of the technology, we assume that country dummies and bank size directly influence technical inefficiency. The parameter estimates highlight that during the sample period, Islamic banking appears to be associated with higher input usage. Correlation between banks performance and banks efficiency Kosmidou (2008) on his journal entitled Measurement of Bank Performance in Greece can be conclu ded that banks have been forced to be more competitive and to implement bank rating systems to evaluate their financial risks. The present study evaluates the performance and efficiency of the commercial and cooperative banks in Greece for the period 2003-2004. The results obtained indicate that commercial banks are tending to increase their accounts, to attract more customers and ameliorate their financial indices, thereby becoming more competitive and maximizing their profits. Concerning the cooperative banks in Greece, the conclusions are not so uniform, since there are banks that are enjoying considerably increased profits and market shares, and others whose financial indices seem to be deteriorating. RESEARCH METHOD Type of Study This research use secondary data which gathered from several sources such as website of Bank Indonesia, website of each banks and contain all information needed. Then, the data analyzed by using SPSS. Population and Sample The populations in this research are conventional banks and sharia banks. Meanwhile, the samples are the banks (11 conventional banks and 11 sharia banks) listed in Bank Indonesia which have been published their financial report from 2008-2011. Research Variables In this study, the dependent variable is SFA (Stochastic Frontier Approach) while the independent variables are CAR, ROA, ROE, NPL, LDR, receivables, third party fund, placement in Bank Indonesia and other banks, and issued capital & fully paid capital. ANALYSIS Classical Assumption Test Multicollinearity Test: The result showed that all of the independent variables used in this research have tolerance value greater than 0.10 and VIF less than 10. Thus, , independent variables are free from multicollinearity symptoms or there is no multicollinearity among the independent variables. Autocorrelation Test: Based on the result of Durbin Watson test, it is known that Durbin Watson value is 1.368 which is between -2 to 2. It means that there is no autocorrelation in the regression model. Heteroscedasticity Test: The graph scatter plot shown that that there is no clear pattern and the points spread above or below the number 0. Then, it can be stated that there is no heterocedasticity. The result of T-Test The independent t-test result obtained for CAR is -2.329, with the probability of 0.022 which less than ÃŽ ±=0.05. Thus, the first hypothesis in this study which states that â€Å"There is significant difference in CAR between conventional and sharia banks in Indonesia† is supported. The independent t-test results obtained for NPL is 1.494, with the probability of 0.139 which is greater than ÃŽ ±=0.05. Thus, the second hypothesis in the study which states that â€Å"There is significant difference in NPL between conventional and sharia banks in Indonesia† is not supported. The independent t-test results obtained for ROA is 2.278 with a probability of 0.025 which is less than ÃŽ ±=0.05. Thus, the third hypothesis which states that â€Å"There is significant difference in ROA between conventional and sharia banks in Indonesia† is supported. The independent t-test results obtained for ROE is 4.040 with the probability of 0.000 which less than ÃŽ ±=0.05. Thus, the fourth hypothesis in the study which states that â€Å"There is significant difference in ROE between conventional and sharia banks in Indonesia† is supported. The independent t-test results obtained for LDR is -1.275 with the probability of 0.206 which is greater than ÃŽ ±=0.05. Thus, the fifth hypothesis which states that â€Å"There is significant difference in LDR between conventional and sharia banks in Indonesia† is not supported. The independent t-test results obtained for efficiency ratio (SFA) is 4.345 with the probability of 0.000 which is less than ÃŽ ±=0.05. Thus, the sixth research hypothesis which states that â€Å"There is efficiency difference between conventional banks and sharia banks in Indonesia† is supported. Multiple Regression analysis result The equation is as follows: SFA = 0,368 – 0,001CAR + 0,071NPL + 0,022ROA + 0,008ROE + 0,001LDR + 0,002REC + 0,00018PBI + 0,00004TPF + 0,002ISSUED + ÃŽ µ The the relationship between bank’s performance and bank’s efficiency is indicated by the multiple correlation coefficient (R) which is equal to 0.674. This means that there is a strong relation ship between the bank’s performance and bank’s efficiency. To clarify whether the relationship between the independent variables and dependent variables are significant or not, it can be tested with the F test. The test showed that F value is 7.213 with the probability 0.000 which is less than ÃŽ ±=0.05. This shows that the Sig F is smaller than the 0.05 value thus, the performance of banks as measured by CAR, NPL, ROA, ROE, LDR, receivable, placement with Bank Indonesia and other banks, third parties fund, and issued capital and fully paid capital are simultaneously related to the efficiency of banks. Thus, the seventh hypothesis which stated that â€Å"There is influence between bank’s performance and bank’s efficiency† is supported. CLOSING Conclusion Based on the result of data processing, there are some conclusions: 1. There is significant difference between sharia banks and conventional banks in terms of CAR. This study finds that sharia banks’ CAR is greater than conventional banks. 2. There is no significant difference of financial performance between sharia banks and conventional banks in terms of the NPL ratio. This means that NPL in sharia banks are equal to conventional banks, which all banks have NPLs below 5%. 3. There is significant difference between sharia banks and conventional banks in terms of ROA. The difference that occur shows that the conventional banks’ ROA is higher than sharia banks which means that the ability of conventional banks in earning profit based on the owned asset is higher than sharia banks’. 4. There is significant difference between the profitability performances of sharia banks and conventional banks in terms of ROE. The difference that occurs shows that conventional banks’ ROE is higher than sharia banks. It means tha t the ability of conventional banks in earning profit based on the owned equity is higher than sharia banks. 5. There is no significant difference in the performance of banks on LDR (Loan to Deposit Ratio). This means the liquidity of sharia banks and conventional banks are equal. 6. There is significant difference in bank efficiency between sharia banks and conventional banks in terms of SFA. In this case, conventional banks are more efficient compare to sharia banks because their SFA value is higher compare to sharia banks’. 7. Banks’ performance has influence on banks’ efficiency. This means that the higher performance of the bank, the more efficient the bank in conducting its operations. Among all of the performance ratios, they are NPL and ROE that have significant influence on efficiency. Meanwhile for the CAR, ROA, LDR, Receivable, Placement with Bank Indonesia and other Banks, Third Parties Fund, and Capital Issued does not have significant influence on bank’s efficiency. Research Limitation This research focused on comparing conventional bank and sharia bank on the basis of financial performance by using CAEL only, because the data used is just financial ratio and effectiveness using SFA. The financial performance and effectiveness can be assessed by analyzing the annual report published by Bank Indonesia. This research uses annual reports from 2008 to 2011 and quarterly data, taken from 11 sharia Banks and 11 well known conventional banks. Recommendations Some suggestions for the future research on this topic based on the limitation that researcher found are mentioned as follows: 1. For Sharia Banks, this research found that sharia banks have lower profitability ratio and efficiency compare to conventional banks. Thus, the researcher would like to recommend sharia banks to increase those ratios by minimizing bank’s operational costs, improving the market to get more customer through innovative sharia products. 2. For Conventional Banks, this research found that conventional banks have lower capital aspect compare to sharia banks. Thus, they need to reduce credit risk by improving credit management in order to reduce the value of risk-weighted assets (RWA). 3. For Banks in general, to improve the efficiency of the bank’s performance, banks should improve the overall performance, both from the capital, assets, management, earnings and liquidity 4. For the Future Researchers, this study uses only five ratios in measuring the bank’s financial performance, the future researchers should use more ratios to measure performance. REFERENCES Abustan. (2009). Analisa Perbandingan Kinerja Keuangan Perbankan Sharia dengan Perbankan Konvensional, Retrieved December 24, 2012, from : http://docs.google.com/viewer?a=v&q=cache:_eUXttjW3VgJ:www.gunadara.ac.id/librar y/articles/graduate/economy/2009 Alphonsius, W. & Tanko, M. (June 24, 2008). CAMELs and Banks Performance Evaluation: The Way Forward. Social Science Research Network. Retrieved April 15, 2012, from http://ssrn.com/abstract=1150968 Endang Sumachdar and Hariandy Hasbi. (2010). Financial Performance Analysis for Islamic Rural Bank to Third Party Funds and The Comparation with Conventional Rural Bank in Indonesia. International Conference on Business and Economics Research. Retrieved April 18, 2012, from http://www.ipedr.com/vol1/67G00011.pdf Mohd, I., Mazlina, N.,