Efficiency and Productivity Growth Analysis of the Islamic Banking
in Indonesia: Data Envelopment Analysis and Malmquist
Productivity Index Approach
Umar Faruk
1
, Disman Disman
2
and Nugraha Nugraha
3
Universitas Pendidikan Indonesia, Jl. Dr. Setiabudhi, 229, 40154, Bandung, Indonesia
Keywords: Data Envelopment Analysis (DEA), Efficiency, Islamic Bank, Indonesia, Malmquist Productivity Index
(MPI), Productivity Growth.
Abstract: The purpose of this paper is to examine the efficiency and productivity growth of the Islamic Banking in
Indonesia. The paper utilizes 11 banks for the duration of 2009 to 2015. Data envelopment Analysis (DEA)
technique is applied to compute technical efficiency, pure technical efficiency and scale efficiency. Also,
Malmquist Productivity Index (MPI) is used to identify the sources of productivity growth of the banks. The
result suggest that Indonesian Islamic Banks are operating below optimum performance and were
managerially incompetent in using their input resources effectively even though they have been operating at
a reasonably optimal scale of operation. Islamic banks seem to be affected during the period of the global
financial crisis from 2008 to 2009. In terms of productivity growth, all the Islamic Banks in Indonesia were
experiencing a decline in productivity mainly attributed to less technological innovation in the Islamic
Banking industry in Indonesia. There is less technological innovation in the Islamic Banking industry of
Indonesia. There is the need for more innovative financial services in terms of improvement in banking
technology. This study is pioneering effort in the application Malmquist Productivity Index (MPI) to study
about the Islamic Banking sector in Indonesia.
1 INTRODUCTION
The development of Indonesian Islamic banking is
aligned with other strategic plans such as Indonesian
Banking Architecture, Indonesian Financial System
Architecture, and both medium and long-term
National Development Plans. Under the dual banking
system, Islamic and non-Islamic banks synergise to
mobilise public funds to foster the financing of the
national economic sector. This role of Indonesian
Islamic banking shows that it has a larger social
mission, instead of being business as usual. The
partnership principle of Islamic banking provides
mutual benefit for both the public and the bank The
global growth of Islamic banking is extensive and that
the Central Bank of Indonesia expects it to also grow
in Indonesia due to a local Muslim population of
87%. However, the Indonesian Islamic Banking
growth is substantially slower than expected
(Faturohman, 2013). The target in 2016 which was
formulated by Bank Indonesia to achieve 5% of
market share was not satisfied. The growth occurs in
Islamic bank was not much better than the growth of
market share it self. Market share target of Islamic
bank in 2015 that was not sufficient is become a
phenomenon to evaluate the performance of whole
Islamic Banking efficiency and productivity in
Indonesia. There are some obstacles such as
competitions, conversion process from Islamic
Business Unit into Islamic Banking, and then it would
be so many investment values to be expended. As a
result, inefficiency would be the great obstacles in
head to head to conventional bank. So the results of
several studies such as Jaelani (2015), Setiawan and
Bagaskara (2016), Kariemah et al. (2016) Rodoni et
al. (2017), Arsal and Hamid (2017) have indicated
that the Indonesian Islamic banks are still operating
below optimal performance due to managerial
inefficiency and low level of innovation.
Faruk, U., Disman, D. and Nugraha, N.
Efficiency and Productivity Growth Analysis of the Islamic Banking in Indonesia: Data Envelopment Analysis and Malmquist Productivity Index Approach.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 213-218
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
213

2 THEORITICAL BACKGROUND
2.1 The Concept of Efficiency and
Productivity
The terms efficiency and productivity have been used
frequently in the media over the last ten years by a
variety of commentators. They are often used
interchangeably, but this is unfortunate becouse they
are not precisely the same things (Coelli, 2005).
Any producing unit is said to be technicaly
efficient when it can produce the maximum amount
of output using the given level of input, or it can
produce given level of output using minimum amount
of input. Efficiency in general is a technical term, it is
sign of efficacy of an individual bank, and
benchmarking of the industry can be evaluated by
peer group (banks) efficiency. Bank’s efficiency can
be evaluated on the basis of two criteria: (1) technical
efficiency (Farrell, 1957); and (2) Allocative or
economic efficiency (Farrell, 1957; Leibenstein,
1966); allocative efficiency is further classified into
two types efficiency, one is cost efficiency (CE) and
other one is profit efficiency (PE) (Berger and Mester,
1997). The estimates of technical efficiency are
decomposed into the product of pure technical
efficiency and scale efficiency. More specifically, the
estimates of technical efficiency are obtained by
running an input-oriented Data Envelopment
Analysis (DEA) model which constructs a grand
frontier enveloping all of the input-output
observations for all banks. Several studies such as
Zeitun and Benjelloun (2013), Pradiknas and
Faturohman (2015) Miranti and Sari (2016), Rodoni
(2017), Arsal and Hamid (2017) have all utilized
DEA method to study about the banking efficiency.
On the other hand, productivity can be assessed
by total factor productivity change (TFPCH). Most of
studies estimated TFPCH using the Malmquist
Productivity Index (MPI) (Mukharjee et al, 2001;
Sufian, 2011). TFPCH can be further decomposed
into technological change (TECHCH), efficiency
change (EFFCH), pure technical efficiency change
(PEFCH), scale efficiency change (SECH). Several
studies such as Kirikal (2005), Kourouchi (2008),
have all resulted that the productivity growth mainly
due to improvement in technological change.
3 RESEARCH METHODOLOGY
3.1 Data sample selection
The data samples in this studi comprises 11 Islamic
banks in Indonesia (BNI Syariah, Bank Muamalat
Indonesia, BSM, BRI Syariah, Bank Mega Syariah,
BCA Syariah, BJB Syariah, Panin Syariah, Bukopin
Sayariah, Victoria Syariah, dan Maybank Syariah).
The other one, BTPN Syariah have been excluded
from this study due to lack of data becouse it spin off
at year 2014. The data is time series data from 2009
to 2015.
3.2 Specification of inputs and outputs
This Study is using the intermediation approach.
This approach considers banks as financial
intermediaries with the function of collecting deposits
from customers and in turn provide loans to
borrowers or invest the funds to generate income
(Sufian et al., 2008; Avkiran, 1999). In this study the
input variables are : deposits, fixed assets, and labor,
while the output variables are : interest income/profit
and loss sharing and fee based income.
3.3 Model spesification
DEA was first presented by Charnes et al.(1978) in an
input orientation model with constant returns to scale.
This model is renowned as the CCR model or the
CRS model. Banker et al. (1984) later extended the
CRS model to a n alternative model known as the
VRS model or the BCC model which is based on
output orientation. In this study, the VRS model is
used based on output orientation. The model
developed by Banker et al. (1984) can be written as:
min = 
subject to ≥ , = 1, 2, … ,
− ≥ 0, = 1,2, … ,
≥ 0, = 1,2, … , .
(1)
The level of efficiency obtained by applying the
BCC model is also called pure technical efficiency
and is obtained by running Equation (1) for all
decisional units. The BCC model eliminates from the
analysis the scale component of efficiency and, thus,
the level of efficiency obtained through the BCC
model is lower or equal to the level of efficiency
resulted from applying the CCR model
In this study, the measurement of productivity
change is based on the output-oriented MPI Caves et
al., 1982; Fare et al., 1994), specify the output-
oriented MTFPI as follows:
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
214

(
, , ,
)
=
,
(
,
)
×
,
(
,
)
/
(2)
This function above, M denotes the productivity
of the production point (xt+1, yt+1) comparative to
the production point (xt, yt). All the Ds represent the
output distance functions. Any value higher than 1
shows positive total factor productivity growth from
period t to t+1. The MTFPI can be divided into two
parts namely EFFCH and TECHCH, which are
defined as below (Fare et al., 1994):
(
, , ,
)
=
,
(
,
)
×
,
(
,
)
×
,
(
,
)
/
(3)
The ratio outside the brackets in Equation (5)
above is a measure of the change in relative efficiency
or the change in how far perceived production is from
full potential production between period t and t+1.
The part inside the brackets represents the geometric
mean of the two ratios indicating the shift in
production technology (TECHCH) between the two
periods. That is to say:
Technical efficiency change
(
EFFCH
)
=
,
(
,
)
(4)
Technological Change
(
TECHCH
)
=
,
(
,
)
×
,
(
,
)
/
(5)
EFFCH in Equation (5) can be further divided into
pure technical efficiency change (PEFFCH) and scale
efficiency change (SECH) subject to a VRS distance
function between period t to t+1 as below (Fare et al.,
1994):
Pure technical efficiency change
(
PECH
)
=
,
(
,
)
(6)
Scale efficiency change
(
SECH
)
=
EFFCH
PECH
(7)
Where : A value of M (MTFPI) greater than one
(i.e. M ˃ 1) denotes productivity growth, while a
value less than one (M ˂ 1) indicates productivity
decline, and M = 1 corresponds to stagnation.
4 RESEARCH FINDINGS
4.1 Efficiency levels of Indonesian
Islamic Banks based on the DEA
approach
From the tabel 1, it is indicated that during studi
period, Indonesian Islamic banks have shown an
average technical efficiency of 24.8 percent of the
amount of inputs employed. This suggests that by
implementing best mangement practices, the
Indonesian Islamic banks on average could reduce
their inputs by at least 75.2 percent and yet volume of
outputs produceed will remain unchanged. That is,
the Indonesian Islamic banks could produce identical
volume of outputs by using only 24.8 percent of the
amount of input. It is important to note however, that
the potential reduction in inputs from implementing
best management practices varies from bank to bank.
Table 1: Summary of efficiency score (Islamic banks).
Efficiency Measures
Mean
Technical efficiency (TE)
0.248
Pure technical efficiency (PTE)
0.277
Scale efficiency (SE)
0.925
The results of the scale efficiency and pure
technical efficiency indicate that pure technical
inefficiency surpasses scale inefficiency in the
Indonesian Islamic Banking industry during the studi
period. Generally, findings reveal that from the
duration 2009 to 2010, the Indonesian Islamic banks
were managerially incompetent in using their input
resources effectively eventhough they have been
operating at a reasonably optimal scale of operation.
4.2 Productivity growth of Indonesian
Islamic Banks based on MPI
Tabel 2 below reports the summary of annual
geometric mean scores of the Malmquist total factor
productivity change (TFPCH) of the Indonesian
Islamic banking for the duration of 2010-2015. The
Malmquist TFPCH and its component are based on
an initial score of 1.000 for year 2010, with year 2010
as the reference year. Therefore, any score higher
(lower) than 1.000 in the following years shows a
progress (decline) in the applicable measure. A
positive EFFCH is considered as evidence of
approaching the frontier, while a positive TECHCH
is understood as innovation (Sufian and Haron, 2008).
As can bee seen in the table, the Islamic banks have
exhibited a decline in productivity by 6.2 percent
based on geometric mean, which was attributed to
Efficiency and Productivity Growth Analysis of the Islamic Banking in Indonesia: Data Envelopment Analysis and Malmquist Productivity
Index Approach
215

decrease in TECHCH by 7.1 percent, and attributed
to decrease in PEFFCH index by 0.3 percent, it is
related to managerially inefficiency. The decreasing
in TECHCH indicated that low level of innovation
such as online banking and the like. EFFCH index
showed an increase of 0.9 percent and the main
source of the increase was due to increase in SECH
of 1.2 percen rather than PEFFCH.
From this analysis, it is interesting to note that
declining in productivity growth was attributed to
decrease in TECHCH and PEFFCH. Hence, there is
the need for more innovative financial services in
terms of improvement in banking technology such as
telephone banking, online banking, mobile banking,
and financial technology in the Indonesian Islamic
banks. The decrease in PEFFCH has indicated that the
Indonesian Islamic banks are managerially
inefficiency. There is the need for improving in bank
management performance through proper planning,
control, and implement best management practices in
their operations.
4.3 Indonesian Islamic Banking
Quadrant Analysis based on
Efficiency Score and MPI
Figure 1 below describe the group of Indonesian
Islamic banks based on the computation of constant
return to scale (CRS) efficiency score and Malmquist
Productivity Index (MPI). The quadrant 1 is
Indonesian Islamic bank with High Efficiency and
High Productivity, namely BNI Syariah has
efficiency mean is 63.31 percent and MPI is 1.365.
Therefore, BNI Syariah is the most successful Islamic
bank in managing resources of the firm, and it has a
high level of innovation financial services, in terms of
improvement in banking technology and has the best
performance in implementing management practices.
Tabel 2: MTFPI (Malmquist Total Factor Productivity Index) in Indonesian Islamic Banking Industry.
Banks
Productivity
EFFCH
TECHCH
PEFFCH
SECH
TFPCH
2010
1.000
1.000
1.000
1.000
1.000
2011
0.871
1.178
0.953
0.914
1.026
2012
1.233
0.688
1.049
1.175
0.847
2013
0.936
1.139
0.926
1.010
1.066
2014
1.081
0.669
1.071
1.009
0.723
2015
0.962
1.124
0.992
0.969
1.081
Mean
1.009
0.929
0.997
1.012
0.938
Figure 1: Four Quadrant of Indonesian Islamic Banking Based on Efficiency Score and Malmquist Productivity Index.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
216

The quadrant 2 group is Islamic bank with high
efficiency and low productivity. The Indonesian
Islamic banks which is involved in this category are
BJB Syariah and Maybank Syariah. BJB Syariah has
efficiency mean is 28.25 percent over of the banking
industry mean, namely 25.5 percent, and it has MPI
is 0.767, while Maybank Syariah has efficiency mean
is 27.55 percent, and it has MPI is 1.000. They are the
Indonesian Islamic banks which are successful in
managing resources of the firm, but in other side has
a low level of innovation.
The quadrant 3 group is Islamic bank with high
productivity and low efficiency. The Indonesian
Islamic banks which is involved in this category are
Bank Muamalat Indonesia, BSM, BRI Syariah, Bank
Mega Syariah, Victoria Syariah. Bank Muamalat
Indonesia has efficiency mean is 24.29 pecent, and it
has MPI is 1.221. BSM has efficiency mean is 21,39
percent, and its MPI is 1.096. BRI Syariah has
efficiency mean is 17.44 percent, and its MPI is
1.155. Bank Mega Syariah has efficiency mean is
20.82, and its MPI is 1.165. Bank Victoria Syariah
has efficiency mean is 20.66 percent, and its MPI is
1.008 over of the industry mean of productivity,
namely 1.005. They are managerially inefficiency in
using resouces of firm efectively, but have a high
level of innovation.
The quadrant 4 group is Islamic bank with low
productivity and low efficiency. The Indonesian
Islamic banks which are involved in this category are
BCA syariah, Panin Syariah, dan Bukopin Syariah.
BCA Syariah has efficiency mean is 17.23 pecent,
and it has MPI is 0.682. Panin Syariah has efficiency
mean is 24.61 percent, and its MPI is 0.901. Bukopin
Syariah has efficiency mean is 18,66 percent, and its
MPI is 0.989. They are managerially inefficiency in
using resources of firm efectively, and have a low
level of innovation.
5 DISCUSSION, CONCLUSION,
AND RECOMMENDATIONS
The study disclosed that the technical efficiency of all
Indonesian Islamic bank, on average were
inefficiency. The Indonesian Islamic banks were
managerially incompetent in using their input
resources effectively eventhough they have been
operating at a reasonably optimal scale of operation.
This study indicates that they are still operating
below optimal performance, thus there is still room
for improvement. Improvement in bank management
performance through proper planning and control is
therefore necessary to attain optimum performance in
the Indonesian Islamic banking sector. If Indonesian
Islamic banks were to implement best management
practices in their operations, on average they could be
able to reduce their inputs by at least 75.2 percent and
still capable of producing the same amount of outputs.
The declining in productivity growth in
Indonesian Islamic banks based on average was
attributed to decrease in TECHCH and PEFFCH.
According to decrease in TECHCH, there is the need
for more innovative financial services in terms of
improvement in banking technology such as
telephone banking, mobile banking, and online
banking infrastructur (Kumar and Gulati, 2008).
Similar to the findings of Rodoni et al., (2017), found
that contribution on productivity in the Indonesian
Islamic banking was not from technology aspect, but
mainly from managerial aspect. All relevant with
results of other studies such as Jaelani (2015),
Kariemah et al (2016), Setiawan and Sherwin (2017).
This will enable the banks to offer secure, reliable and
dynamic banking services to their clients. Introducing
new technologies and diversifying their products and
services will help shift the production frontier
positively.
The decrease in PEFFCH has indicated that the
Indonesian Islamic banks are managerial
inefficiency. There is the need for improving in bank
management performance through proper planning,
control, and implement best management practices in
their operations.
6 RECOMMENDATION FOR
FUTURE RESEARCH
This study serves as a foundation for future
researchers who wish to explore more about the
efficiency and productivity growth of the Indonesian
Islamic banks. It is important to note that this research
suffered a number of limitations with regards to the
availability of data for Indonesian Islamic banks. This
made it difficult to do extra analysis in the Indonesian
Islamic banking sector. Nevertheless, the utilization
of DEA and the MPI gave a good representation of
the performance of the Indonesian Islamic banking
sector during the duration of the study. Future
research may use larger data sample alongside longer
sample periods in order to offer more understanding
into the efficiency and productivity growth of the
Indonesian Islamic banks.
Efficiency and Productivity Growth Analysis of the Islamic Banking in Indonesia: Data Envelopment Analysis and Malmquist Productivity
Index Approach
217

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