Performance Measurement of Islamic Bank in Indonesia, is Merger Necessary?

Abstract

In 2021, Indonesia’s administration decides to conduct a merger among Islamic government bank. The emerge of syariah financial market is the reason of this policy. This study analyzes Islamic banks merger policy by assessing their financial performance. The purpose of this study is to analyze financial efficiency of Islamic Banks and Conventional Banks in Indonesia based on the 2019 financial reports by using the Data Envelopment Analysis (DEA) method. Practical contributions of this study for the banking industry was as a guidance for the management in measuring banking activities by analysing the efficiency level so that it can be used to compile business strategies. Basically, financial performance analysis is the result of evaluation of past performance. In this study, we use different analyses in order to obtain a company’s financial position that represents the company’s reality and potential for continuous performance. Business performance represents effectiveness and the efficiency of an organization or company. Company or organization assess their performance to understand their achivement and evaluate their business plans. In this study we developed business performance measurement based on input and output of Islamic and conventional banks in Indonesia. We employ Data Envelopment Analysis which calculate the ratio between output and input. In this study, we use deposits, fixed assets and labor costs as input, while credit or financing and operating income as output variables. In this study, we find that there are several conventional and Islamic banks that suffers inefficiency. This inefficiency occurs due to the ratio of inputs and outputs in conventional and Islamic banks are not optimum.