DETERMINANTS OF PERFORMANCE IN INDONESIAN BANKING:A CROSS-SECTIONAL AND DYNAMIC PANEL DATA ANALYSIS

This paper examines determinants of bank performance inIndonesia for theperiod of 1994-1999. It was pooled cross-sectional time series and dynamic paneldata models. This research incorporates the traditional Structure-Conduct-Performance (SCP) and Relative Efficiency (RE) hypotheses. The estimationresults show that bank performance industry is competitive, and implies thatmarket structure in Indonesian banking sector is nearly perfect competition.However, no evidence has been found in this study in support of the traditionalSCP, while RE is otherwise. The negative relationship between loans to businessgroups and bank performance, which is likely due to the high loans provided tothem, thus supporting the moral hazard hypothesis. The negative relationshipbetween market share loan and return on assets, the negative relationship betweendebt-to-total assets and bank performance is likely because of the high level ofdebt. The negative relationship between debt-to-total assets and bank performancein a scenario of high interest rates indicates that banks acted responsibly by payinghigh interest charges prevailing at that time. This also results in the negativerelationship between capital adequacy ratio and bank performance.