Abstract:
This paper investigates the inter-temporal relationships between non-performing financing
(NPF) and cost efficiency of Islamic Banks in Indonesia during the period 2012(Q1) to
2015(Q2). This research uses quarterly published reports data of Central Bank of Indonesia
(Bank Indonesia).The Data Envelopment Analysis (DEA) approach is used to measure cost
efficiency of Islamic Banks. The inter-temporal relationship between NPF and cost efficiency
is estimated using VAR model by testing two of the four hypotheses introduced by Berger and
DeYoung (1997). The finding of DEA indicates that Bank Victoria Syariah (BVS) was the
most cost efficient. The average cost efficiency of Islamic banks was 0.937 or 93.7%. The
finding also indicates that Islamic banks are still inefficient in managing the costs. This result
supports the “bad management” hypothesis. The ‘bad management’ hypothesis indicates that
the major risks facing financial institutions are caused by the internal problems. In terms of
variables that determine NPF by using panel least square, the findings reveal that GDP
growth rate, Inflation and Capital Adequacy Ratio (CAR) have a negative and significant
effect on NPF, while Exchange rate and Operational Efficiency Ratio (OER) have a positive
and significant effect on NPF. Financing Deposit Ratio (FDR) has no significant effect on
NPF.
