In this paper, I analyse the importance of physical distance between banks to their nearest rival bank and the area or market boundary as proxy of spatial competition. I estimate the effect of spatial competition, together with bank-specific characteristics, industry-specific characteristics, and macroeconomic variables on bank performance measured by profitability and efficiency. The competition models used in this study are Panzar and Rosse model, Lerner Index model, and Boone Indicator model. To measure the cost efficiency of banks, I use Stochastic Frontier Analysis (SFA).
This study first examines relevance of spatial competition for the bank profitability using ROA, ROE, and NIM. Second, this study examines relevance of spatial competition for the bank efficiency. The results reveal that overall the distance of banks‟ to the nearest bank negatively impact profitability, but positively impact the efficiency. The area of market boundary, proxied by Thiessen Polygon of each bank has positive impact to bank profitability and efficiency. The Lerner index also shows that the rural banks have mark-up pricing in all models since the index positively affect the performance. The Boone indicator shows negative value, consistent with the industrial organisation literature that this value is expected to be negative. Overall, the findings show that spatial competition exists in rural banking in Indonesia.
38 Glossary
ASEAN Association of Southeast Asian Nations
BI Bank Indonesia (Central bank of Indonesia)
BCBS Basel Committee on Banking Supervision
BPR Bank Perkreditan Rakyat – Rural Banks in Indonesian language,
“People‟s Credit Bank”
BPS Badan Pusat Statistik (The Indonesian Central Bureau of Statistics) CEPII Centre d‟Etudes Prospectives et d‟Informations Internationales
DEA Data Envelopment Analysis
ESH Efficient Structure Hypothesis
FSA Financial Services Authority
GMM Generalized Method of Moments
HHI Herfindahl-Hirschman Index
IADI International Association of Deposit Insurers
IDIC Indonesia Deposit Insurance Corporation
LPS Lembaga Penjamin Simpanan (Indonesia Deposit Insurance Corporation - IDIC)
MMR Martinez-Miera and Repullo model
NEIO New Empirical Industrial Organization
OJK Otoritas Jasa Keuangan (Indonesia Financial Services Authority)
PRH The Panzar and Rosse H-statistic
SCP Structure Conduct Performance
SDEM Spatial Durbin Error Model
SFA Stochastic Frontier Approach
SME Small Medium Enterprises
TBTF Too Big To Fail Banks
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