Exploring the Efficiency Gap of Islamic Banks in Indonesia: A Dual Perspective on Operating-model Type and Institutional Ownership
Satriyo Dwicahyo

Sekolah Vokasi, Universitas Gadjah Mada

Abstract

The study explores the operational efficiency gap between Islamic banks (IBs) in Indonesia, from operating model perspective (full-fledged IBs vs Islamic Window Banks) as well as differences based on institutional ownership structures (regional versus non-regional development IBs). Utilizing panel data regression analysis, this research examines efficiency using the operating expense-to-income ratio (BOPO), comparing 13 full-fledged IBs and 20 Islamic windows of conventional banks during 2018-2023. The study finds that Islamic window banks are more efficient compared to full-fledged IBs, as indicated by lower BOPO ratios. The same result holds for the non-regional development IBs sub-sample, but not for the regional development IBs. Furthermore, IBs owned by regional government (both full-fledged and Islamic window IBs) in overall are more efficient than their non-regional development IB counterparts. Other factors such as bank size, profitability, and stability significantly improve efficiency across all bank types. These findings suggest that the operational model significantly influences bank^s efficiency, as the Islamic window model benefiting from resource sharing with their parent conventional banks. Additionally, regional government ownership also impacts IBs^ efficiency. The findings are expected to have policy implications, particularly regarding the spin-off policy for Islamic window of conventional banks, by providing views of the potential advantages of the resources-sharing model and regional government backing in enhancing IBs^ efficiency in Indonesia.

Keywords: Islamic banks, full-fledged, Islamic window bank, efficiency

Topic: Islamic finance and banking