Foreign participation and banking competition: Evidence from the Indonesian banking industry

Tri mulyaningsih, Anne DALY, Riyana MIRANTI

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

Foreign participation in Indonesian banking has expanded from the establishment of foreign de novobanks into the acquisition of existing local banks. The increase in foreign participation has therefore notbeen associated with a growing number of banks. This study aims to examine the competitive behaviorof foreign and local banks as a competitive banking industry is important in boosting economic efficiencyand economic growth. This study also examines the role of modes of entry of foreign banks on competi-tion, either through the establishment of foreign de novo banks or the acquisition of local banks. The recentmethodological refinements of the Panzar–Rosse method developed by Bikker et al. (2011) are employedto estimate the level of competition among local and foreign banks. Generally, the foreign banks, par-ticularly foreign de novo banks behaved more competitively than local banks, and their penetration istherefore important in creating a contestable market. This study found that in terms of assets, on averageforeign de novo banks were smaller, more efficient, and had lower overhead costs, so they could offerlower loan rates and disburse more loans. The recent consolidation in the Indonesian banking industrymay have an adverse impact on competition as it restricts the establishment of foreign de novo banks.
Original languageEnglish
Pages (from-to)70-82
Number of pages13
JournalJournal of Financial Stability
Volume19
DOIs
Publication statusPublished - 26 Jul 2015

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