Profit Efficiency and The Influence of Financial Performance Measures on Cost Efficiency of Rural Banks in Indonesia

Abstract

Efficiency is a crucial aspect for banks to achieve healthy and sustainable financial performance. This study aims to analyze the profit and cost efficiency of Rural Banks (BPRs) in Indonesia from 2018 to 2022, as well as examine the influence of financial performance measures on the cost efficiency of these banks. The sample for this research consists of 497 BPRs located in West Java, East Java, and Bali. Stochastic frontier analysis is used to test efficiency, employing an intermediation approach for cost efficiency and a production approach for profit efficiency. Tobit regression is utilized to test the impact of financial performance measures, represented by the NPL ratio, LDR, CAR, and total assets.
The results indicate that the BPRs in the three regions were inefficient in terms of cost efficiency from 2019 to 2022, as well as profit efficiency during the same period. The Tobit regression results reveal that financial performance measures such as NPL, CAR, and total assets have an influence on cost efficiency, while the LDR ratio does not affect cost efficiency.