Financial deregulation and the cost structure of state and private banks in Indonesia: Some evidence from microeconomic data

Since the major deregulation of Indonesian banking in the late 1980s the quality and availability of local banking services has significantly expanded. But controversy continues over the impact of deregulation on the industrial structure of banking in Indonesia. This paper uses micro data to examine the impact of deregulation on the costs and profitability of the state commercial banks in comparison with a benchmark sample of relatively efficient private banks. The sample period covers both the pre-and postderegulation eras. The study finds that deregulation had a strong impact. At the private banks, large cost reductions have been passed on to customers in the form of narrower intermediation margins. By contrast, margins have barely changed at the state banks. Profitability measured in relation to equity has fallen significantly, especially at state banks. For recent years, the margins are not out of line with available data on international comparators.