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MEASURING EFFICIENCY AS INTERMEDIATION APPROACH BETWEEN CONVENTIONAL AND SHARIA BANKS IN INDONESIA

As a financial intermediary, a bank accepted deposits and channels loans. However, the loans disbursed by bank were hard to be liquidated compared to deposits which were easier to be liquidated. If the asset side fluctuates, customers would take their deposit away and create a bank run. On the other side, Islamic Bank used profit and loss sharing pattern to their loans and deposits. With this pattern, Islamic bank’s cost of funds was a function of their asset. With this pattern, there are possibilities that Islamic Banks’ revenue would fluctuate more compared to conventional banks that were based on interest. The purpose of this research was to compare the efficiency between Islamic banks and conventional banks without trying to look whether the cause of inefficiency was able to be allocated or technical inefficiency. To measure efficiency, we used De Young’s argument (1997), pooled leased square with intermediation approach and alternative profit efficiency model. The unit analysis in this research were commercial banks with 102 conventional banks and 3 Islamic Banks that operated in Indonesia using their quarterly annual report between 2002-2007. The finding from this research showed that 3 Islamic Banks were among the 20% most efficient bank in Indonesia in doing intermediation function.