Islamic Banking: Banking Efficiency Analysis in Indonesia

Banking sector has an important role for the Indonesian economy. Indonesia implements the dual banking system, conventional banks and Islamic banks. It provides an excellent opportunity for the growth of Islamic banking industry in Indonesia. Islamic banking industry in Indonesia has improved in number of banks and branches but the performance of Islamic banks has decreased in recent years. In addition, Islamic banking still provides a lower rate of return than conventional banking. This study aims to measure the efficiency of Islamic banking in Indonesia using the intermediation approach and input orientation. The results showed that Islamic Banks (BUS) and Islamic Business Units (UUS) in Indonesia have not been operating efficiently based on Data Envelopment Analysis (DEA) method. The estimation results of data panel regression model showed total financing and CAR have positive and significant impact, whereas the deposits have negative and significant impact to the efficiency of BUS and UUS in Indonesia.