Measuring the Efficiency of Indonesian Sharia Banking with Stochastic Frontier Analysis: Pre-Merger and Post-Merger

Abstract

This study examines the efficiency of Indonesian Sharia banking using Stochastic Frontier Analysis from 2019 to 2023, focusing on pre-merger and post-merger phases. This study uses a quantitative parametric approach with Stochastic Frontier Analysis. The input variables used are deposit funds (saving), assets, and administrative and general costs, while the output variables are the financing and other operating income. The analysis includes 16 Islamic Commercial Banks in the pre-merger period and 13 Islamic Commercial Banks in the Post-Merger Period. The results reveal a significant improvement in the efficiency of Sharia banks following the mergers. For Islamic Commercial Banks, the average efficiency score increased from 0.833 for financing and 0,733 for income in the pre-merger period (2019-2020) to 0.898 for financing and 0,8019 in the post-merger period (2022-2023). These findings indicate that the mergers have positively impacted the operational efficiency of Indonesian Sharia banks. This study provides valuable insights for policymakers, regulators, and financial institutions, highlighting the importance of strategic consolidations to enhance efficiency. The improvement in efficiency scores post-merger suggests that such consolidations enable better resource allocation, enhanced economies of scale, and improved management practices, thereby contributing to the overall stability and performance of Sharia banking in Indonesia.