International Journal of Islamic and Middle Eastern Finance and

Management
Islamic bank vs conventional bank: intermediation, fee based service activity and
efficiency
Dimas Satria Hardianto Permata Wulandari

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IMEFM
9,2

Islamic bank vs conventional

bank: intermediation, fee based
service activity and efficiency

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296
Received 5 January 2015
Revised 11 November 2015
1 February 2016
Accepted 15 February 2016

Dimas Satria Hardianto and Permata Wulandari

Department Management , Faculty of Economy and Business,
Universitas Indonesia, Depok, Indonesia
Abstract
Purpose The aim of this research is to compare the differences of intermediation, fee-based service
activity and efficiency of conventional banks vs Islamic banks in Indonesia for the 2011-2013 period.
Moreover, this study also includes some control variables to find their effect on the dependent variables.
Design/methodology/approach This research uses two methods, namely, stochastic frontier
approach and panel data regression.
Findings The result indicates that Islamic banks have a higher intermediation ratio, have higher
proportion on fee income-to-total operating income and are less efficient. The control variable that has
a positively significant effect on intermediation ratio is size; meanwhile, inefficiency and non
loan-earning asset are negatively affecting the intermediation ratio. The control variable that show a
positively significant effect on the proportion of fee income-to-total operating income is size; meanwhile,
the credit risk variable has no significant effect on the proportion of fee income-to-total operating
income. Size and credit risk are the control variables that have a negative relation to efficiency.
Originality/value This study has significantly contributed to Indonesian Islamic banking based on
which the Islamic banking manager should recognize that the intermediation level, fee-based service
activity and efficiency are crucially important in establishing competition and maintaining sustainable
Islamic banking.
Keywords Efficiency, Islamic banks, Conventional banks, Fee-based income, Intermediation,
Stochastic frontier approach
Paper type Research paper

International Journal of Islamic

and Middle Eastern Finance and
Management
Vol. 9 No. 2, 2016
pp. 296-311
Emerald Group Publishing Limited
1753-8394
DOI 10.1108/IMEFM-01-2015-0003

1. Introduction
A bank is a financial institution which is crucial for a countrys economic growth
because it connects to the monetary and real sectors (Mishkin, 2010). In Indonesia, the
bank is popular financial institution and is the first place for providing funding for
economic activities. This can also be seen from the banking industry assets that control
79.5 per cent of the total assets in the financial industry (Bank Indonesia, 2012). As an
intermediary institution, a bank generally gives profit to depositors and vice versa.
Moreover, the Indonesian banking industry adopts a dual banking system based on
which commercial banks can conduct business activities and Islamic banks, which
operate under Islamic principles, are regulated under Bank Indonesia regulation No.
10/16/PBI/2008. Islamic banks were established because although the majority of the
Indonesian population are Muslim, none of the banks implemented Islamic bank
principles (Sutan, 2010).

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Nowadays, there is a growth in Islamic banks in Indonesia and world over. The total
assets of the Islamic finance industry in the world from 2006 to 2011 have doubled and
reached $900bn. The growth of an Islamic bank is very fast and it is referred to as the
fastest growing industry in Indonesia but still faces many obstacles. The most
important problem is dealing with lack of understanding of financial institution
knowledge among the Indonesian people (only 20 per cent of the adult population have
an account in any formal financial institutions) (World Bank, 2012). With this problem,
only a small portion of Indonesian people know about banking products, especially
Islamic banking which is still new in Indonesia. The other problem is the limited number
of Islamic banks and lack of a office network and human resources (Siamat, 2005).
Furthermore, the Islamic bank model is similar to the conventional bank model in
terms of raising fund, funding and providing other banking services. But, in practice, the
Islamic banks apply Shariah principles that forbid riba, gharar and maysir and
prohibited financing for the sale of weapons, narcotics, alcohol and others according to
the Islamic law and hence different from conventional banks. Distribution of funds in
Islamic banks is conducted by using the principle of sale and purchase, lease and profit
sharing. Besides, getting revenue from intermediation activities, both Islamic and
conventional banks get additional income through the provision of financial services
such as inter-bank money, transfer, bill payment, safety deposit box and other services.
Good income diversification conducted by the bank, both Islamic and conventional, is
very useful to improve the profitability of banks, increase the number of customers and
also reduce the impact of bad credit. Because of many limitations of fund distribution in
Islamic banks, Islamic banks will find other alternatives to increase profitability by
raising fee-based income.
Another issue is how to increase efficiency. A banks always tries to get many
customers to achieve good efficiency. With good efficiency, a bank will have low cost of
fund and therefore it can provide a competitive lending rate and get higher profitability.
In the case of the banking industry, the size to measure efficiency is BOPO (ratio of
operating expenses per operating income). This is the common measurement of
efficiency in banking institutions. Based on data from Bank Indonesia during 2008-2012,
BOPO has been shown to be higher compared to that in banks of countries in Southeast
Asia (Bank Indonesia, 2012). This means that low inefficiency which is the function of
intermediation is not working optimally and because banks are no longer attractive as
sources of fund. One of the reasons is low market share, as only 20 per cent of the
Indonesian people have a formal account in a formal banking system (World Bank,
2012).
As a comparison between Islamic and conventional intermediation, fee-based income
and efficiency are shown in Table I.
As a consequence, research which focuses on the intermediation function is useful for
analyzing the business model which has capabilities of converting third-party fund for
financing. This research tries to contribute to this area. Fee-based service research
between conventional and Islamic banking is useful to observe income diversification
capability between two kinds of banks, as Islamic banks have a limitation of fund
distribution. The high inefficiency in the Indonesian banking industry has resulted in
high costs of funds, causing competitiveness among Indonesian banks; this
phenomenon is relatively lower than other countries. Several researches have discussed
this problem (Beck et al., 2013; Johnes et al., 2013; Abdul-Majid et al., 2009; Rindawati,

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2007; Saragih, 2013; Nugroho, 2013; Hasniawati, 2012), but no study has discussed
intermediation, fee-based service activity and efficiency in Indonesian Islamic and
conventional banking contexts.
This study focuses on Indonesian Islamic and conventional banking and aims to
conduct a comparison study about intermediation, fee-based service activity, efficiency,
impact of control variable (size, inefficiency and nonloan-learning asset) on the
intermediation level, impact of control variables (size, credit efficiency and credit risk)
on fee-based service and impact of variable control (size and credit risk) on efficiency
between Islamic and conventional banks in Indonesia from 2011 to 2013.
Last, it employs a quantitative analysis using secondary data of 39 conventional
banks and 8 Islamic banks. Data processed using panel regression and statistical tests
using MS Excel, Stata and also Eviews 7. Moreover, this paper is structured as follows.
Section 2 provides a conceptual background, while Section 3 explains the methodology
used in this study. Section 4 presents the results and findings and the related discussion.
Section 5 concludes and highlights the important implications of the study.
2. Intermediation, fee-based service and efficiency concept in Islamic
banks
Financial intermediation is an activity to distribute funding from a surplus unit to a
deficit unit (Saunders and Cornett, 2010). This intermediation activity is a traditional
activity which is commonly conducted by all banks, both conventional and Islamic.
Products which are offered by Islamic banks include financial engineering similar to
conventional bank, but this has been adjusted according to Islamic principles. It can be
concluded that Islamic banking products are more varied than those of conventional
banks.
Besides financial intermediation, Islamic banks also provide other financial services
to create income diversification and add value to customers. Fee-based services that are
provided by Islamic banks to their customers are divided into three groups: financial
service, agent service and non-financial service. Wakalah (financial representative),
Kafalah (guarantee), Hiwalah (account receivable transfer), Rahn (pawn) and Sharf

Period
March 2011
June 2011
September 2011
December 2011
March 2012
June 2012
September 2012
Table I.
Indonesian Islamic
December 2012
and conventional
March 2013
banking performance June 2013
comparison
September 2013

Intermediation
LDR
FDR
conventional
Islamic
bank (%)
bank (%)
83.56
84.80
84.91
82.59
78.70
79.83
79.24
80.97
80.33
81.23
77.44

90.47
91.24
106.73
108.32
90.65
110.70
120.87
99.02
98.99
103.21
111.31

Fee-based income
FEE
FEE
conventional
Islamic
bank (%)
bank (%)
4.71
5.27
6.27
5.19
5.27
4.73
4.60
4.71
5.58
5.10
5.33

4.88
3.14
2.26
4.86
4.77
4.12
3.80
3.94
2.98
3.20
2.93

Efficiency
BOPO
BOPO
conventional
Islamic
bank (%)
bank (%)
82.82
83.70
83.18
84.01
81.75
81.11
81.44
81.38
81.18
81.54
84.37

77.42
79.39
79.10
84.32
81.12
78.86
78.53
78.85
79.87
80.33
87.31

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(foreign exchange) are fee-based service activities under the financial service group.
Mudharabah muqqayyadah (profit-sharing activity) is a fee-based service under the
agent group. Last, Wadiah yad dhamanah (product or money deposit) is a fee-based
service under the non-financial service group.
Efficiency is a performance measurement which figures the banking ability to
manage their input to get output. In the process of conducting efficiency measurement,
a bank will face a condition of how to get optimal output with existing input. There are
three concepts to measure efficiency (technical efficiency, cost efficiency and allocative
efficiency). Technical efficiency is the comparison between input that is being used to
get a certain output. Production process will be technically efficient if the output will not
increase without additional input. This will measure the banking financial performance
(Farrell, 1957). Cost efficiency is a concept that uses input pricing, while allocative
efficiency is the efficiency measurement of banking financial ability that uses input in
optimal proportion.
Research about the bank intermediation level, fee-based service activity and
efficiency is not new. Researches on three things are widely used by various researches.
The most recent study was conducted by Beck et al. (2013) which examines a business
model, efficiency, asset quality and stability of Islamic and conventional banks. In this
study, the efficiency measurement is conducted using traditional approaches (BOPO
ratio and overhead cost per operating income). The result shows that the level of
efficiency in conventional banks is better than that in Islamic banks. Besides efficiency,
the study also examined the business model that is measured by intermediation,
fee-based service and the source of funds. In this study, the intermediary function of
Islamic banks is better than that of conventional banks. This condition occurred because
of the nature of Islamic bank financing which always involves both physical assets and
the principles of Islamic banks that do not let idle money. In addition, although the level
of Islamic bank intermediation is higher compared to that of conventional banks,
Islamic banks as a whole turned out to not only rely on financing activities as a source
of income because the service income proportion of Islamic banks is higher than that of
conventional banks.
Besides Beck, Johnes et al. (2013) also conducted a research about Islamic banks and
conventional efficiency. This research study about bank efficiency using the data
envelopment analysis method and about external factors using regression that affects
the efficiency level of the bank. This research stated that Islamic banks have the same
level of gross efficiency with conventional banks. Islamic banks have significantly
higher net efficiency of conventional banks. Moreover, Islamic banks also have a lower
efficiency type than conventional banks because the product is not standardized. Other
efficiency researches have been conducted by Abdul-Majid et al. (2009) who stated that
the efficiency level depended on the country in which the bank operated. There is no
clear correlation between the banking efficiency level and the business model.
An intermediation ratio comparison between Islamic and conventional banks was
also conducted by Rindawati (2007), Saragih (2013), and Nugroho (2013) using
Indonesian samples. These researches study about the comparison between Islamic and
conventional banks using the CAMEL ratio which resulted in different findings,
although they used the same method. t-Test is used to compare the loan-to-deposit ratio
to measure the intermediation and liquidity levels, while BOPO is also used to measure
the efficiency level. Research from Rindawati (2007) found that the intermediation level

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300

of Islamic banks is better than that of conventional banks, while the efficiency of Islamic
banks is lower than that of conventional banks. In contrast, Saragih (2013) found that no
significant differences in the intermediation level between Islamic and conventional
banks. While, research from Nugroho (2013) found that the intermediation level of
conventional banks is better than that of Islamic bank and the efficiency level of Islamic
banks is lower that that of conventional banks. Such varying results depend on the
sample used.
Research regarding fee-based service in Indonesia was also conducted by Hasniawati
(2012). The results show that total asset and profitability influence bank service income
positively, while negatively influencing non-performing financing banks. Banks that
have a bigger total asset will be ready to implement new technology to support their
banking services. Non-performing financing variables which become a proxy of credit
risk have a negative correlation because the bank which has a high credit risk will focus
on traditional banking activity (lending and funding).
3. Research method
This study used secondary data obtained mainly from the quarterly financial
statements published by each bank which routinely audited. A purposive sampling
method was used to collect sample data. The data required are collected using the
following criteria: first, in Indonesia, commercial banks operated from Quarter 1 2011 to
Quarter 3 2013 and routinely issued audited financial statements. Second, conventional
banks were already listed in the Indonesia Stock Exchange no later than December 31,
2010, and were recorded until Quarter 3 of 2013.
Based on these criteria, 39 banks, including 31 conventional banks and 8 Islamic
banks, were used for observation in this study. Thus, the total sample was 429 (39
companies with 11 quarterly observations). The samples used are shown in Tables II
and III.
First, this study uses stochastic frontier approach to measure the inefficiency of
commercial banks. Meanwhile, to perform three comparisons, three models are used.
The first model using generalized least squares with fixed effect model (FEM), the
second model using a generalized least squares with pooled least squares (PLS), while
the third model using random effect models (REM). The stochastic frontier approach
was used to refer to the functions that were created by Battese and Coelli (1995),

Bank code

Bank

147
422
425
427
451
506
517
536

PT Bank Muamalat Indonesia

PT Bank Syariah Bri (B.Djasa Arta)
PT Bank Jabar Banten Syariah
PT BNI Syariah
PT Bank Syariah Mandiri, Tbk
PT Bank Syariah Mega Indonesia
PT Bank Panin Syariah (D/H Bank Harfa)
PT BCA Syariah (D/H Bank UIB)

Table II.
Islamic bank samples Source: Bank Indonesia, 2013a, 2013b

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Bank code

Bank

2
8
9
11
13
14
16
19
22
28
36
37
54
76
87
95
97
110
145
146
153
167
200
212
213
426
441
485
494
558
566

PT Bank Rakyat Indonesia (Persero) Tbk

PT Bank Mandiri (Persero) Tbk
PT Bank Negara Indonesia (Persero), Tbk
PT Bank Danamon Indonesia Tbk
PT Bank Permata Tbk (D/H PT. Bank Bali)
PT Bank Central Asia Tbk.
PT Bank Internasional Indonesia Tbk
PT Pan Indonesia Bank, Tbk
PT Bank Cimb Niaga, Tbk
PT Bank OCBC NISP, Tbk
PT Bank Windu Kentjana International, Tbk
PT Bank Artha Graha Internasional Tbk
PT. Bank Capital Indonesia, Tbk
PT Bank Bumi Arta, Tbk
PT Bank Ekonomi Raharja Tbk
PT Bank Mutiara Tbk
PT Bank Mayapada Internasional
PT BPD Jawa Barat dan Banten, Tbk
PT. Bank Nusantara Parahyangan Tbk
PT Bank Swadesi, Tbk
PT. Bank Sinarmas, Tbk
PT Bank Kesawan, Tbk
PT Bank Tabungan Negara (Persero), Tbk
PT Bank Himpunan Saudara 1906, Tbk
PT Bank Tabungan Pensiunan Nasional
PT Bank Mega, Tbk
PT Bank Bukopin, Tbk
PT Bank Bumiputera Indonesia
PT Bank Agroniaga Tbk
PT Bank Pundi Indonesia, Tbk
PT Bank Victoria International, Tbk

Source: Bank Indonesia, 2013

developed by Liadaki and Ganganis (2009). The methodology framework is shown in

Figure 1.
Three regression used in this research are:
(1) Model to analyze intermediation level:
INTit 0 1 BUSit 2 Sizeit 3EFFit 4NLEAit it
(2) Model to analyze fee based service:

(1)

FEEit 0 1BUSit 2Sizeit 3Riskit it

(3) Model to analyze efficiency:

(2)

EFFit (qit, pit, ) (Uit Vit )

(3)

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301

Table III.
Conventional bank
samples

IMEFM
9,2

Sample selection
Descriptive statistics

302

Panel Regression

Stochastic frontier approach

Panel Regression Selection

SFA Score

Likelihood Ratio

Hausmann Test

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Intermediation, fee based, efficiency model fit

Classic Assumptions Test
Autocorrelation

Figure 1.
Methodology
framework

Heteroscedasticity

Multicollinierit
y

Regression Analysis
R2 Test

Partial test

Global Test

Table IV.
4. Findings and discussion
4.1 Statistic descriptive
Tables I and II show the descriptive statistic of both conventional and Islamic banks
(Table V).
The descriptive statistics mentioned above consist of 429 observations, including 31
and 8 conventional commercial banks and commercial bank, respectively, during the
period from March 2011 to September 2013. Data descriptive statistics mentioned above
do not contain outliers which have been discarded because it uses techniques winsorize

Table IV.
Variables definition

Variable

Definition

INTit
BUSit

Bank Intermediation Level

Conventional LDR
Islamic FDR
Banking identity

Sizeit

Bank size

EFFit
NLEAit
FEEit
Riskit

Cost efficiency score SFA

Non-loan-earning asset
Service income proportion
Conventional Nonperforming loans
Syariah Nonperforming financing

Calculation

Source
(Beck et al., 2013)

Total credit/Deposit
Total financing/Deposit
1 if Islamic bank
0 if conventional bank
ln(total asset)

Calculated using SFA method

Securities/Total asset
Service income/Operating income
Weighted average of substandard,
doubtful and bad loans per total
loans from a bank

(Beck et al., 2013)

(Beck et al.,
2013), (Rogers
and Sinkey,
1999), (Shahimi
et al., 2006),
(Saunders and
Cornett, 2010)
(Beck et al., 2013)
(Beck et al., 2013)
(Beck et al., 2013)
(Abd Karim et
al., 2010), (Berger
and DeYoung,
1997)

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by cutting 5 per cent upper limit and below. Descriptive statistical data already contain
no outliers.
The intermediation ratio for commercial banks as a whole had an average of 84.5 per
cent. The maximum value of 205.31 per cent owned by Panin Syariah in September 2011
received more financing than deposit, while the minimum amount of 44.25 per cent was
owned by the Capital Bank in December 2011, with a standard deviation of 0.150737.
The average proportion of service revenue per operating income for commercial banks
as a whole was 4.7 per cent. The maximum value held by Bank Mega in March 2013 was
20.3 per cent, while the minimum value owned by Bank Panin Syariah in June 2011 was
0.03 per cent. The standard deviation of the observation was 0.0441.
Inefficiencies scores for commercial banks as a whole was 1.304. The maximum
value owned by Bank Rakyat Indonesia (BRI) Shariah in September 2012 was 4.17,
while the minimum value held by Bank Ekonomi Raharja in September 2011 was 1. The
high inefficiency owned by BRI Shariah can also be confirmed from BOPO which is also
high, reaching 89 per cent. The standard deviation for all observations was 0.459. The
average efficiency for BUK was 1.2, and the average efficiency for Islamic banks is 1.72.
The average NPL (NPF) for commercial banks as a whole was 2.62 per cent. The
maximum value held by Bank Pundi in March 2011 was 25.14 per cent, while the
minimum value owned by Bank Panin Syariah in December 2011 was 0 per cent.
The standard deviation of the observation is 0.07 per cent.
The average non-earning asset loans to commercial banks as a whole was 8.9 trillion.
The maximum value owned by BRI in March 2011 was 101 trillion, while the minimum
value owned by Capital Bank in December 2011 was 19 billion. The standard deviation
of the observation was 18 trillion. The average total assets for commercial banks as a
whole amounted 78.1 trillion. The maximum value of 616.3 trillion was owned by the
Bank in September 2013, while the minimum value of 518.7 million was owned by Bank
Panin Syariah in March 2011, with a standard deviation of 127 trillion.

Islamic
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4.2 Panel model decision

To get the most suitable model for this study, it is necessary to do some testing to
determine whether the chosen model is: PLS, FEM or REM. Some of the tests performed
are log likelihood (Chow Test) and Hausman test (Gujarati, 2009) (Table V).
From Table V, it can be concluded that from the first model, the level of
intermediation will be estimated using FEM, the second model of the fee-based service
will be estimated using PLS and the third model of efficiency will be estimated using
REM.

Mean
MED
Maximum
Minimum
SD
Observation

INT

FEE

EFF

RISK

NLEA

TA

94.30%
92.33%
127.52%
74.14%
13.10%
88

4.54%
3.19%
17.60%
0.06
4.91%
88

1.94
1.79
2.70
1.05
0.6
88

2.39%
2.75%
5.68%
0.37%
1.35%
88

8.31%
6.13%
23.58%
2.25%
6.04%
88

13.457.697
7.532.542
61.810.295
1.903.873
15.711.881
88

Source: Output Eviews

Table V.
Statistic descriptive
Islamic bank

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4.3 Classic assumption testing

4.3.1 Multicollinearity. Multicollinearity occurred when the correlation was more than
0.8. The results are shown in Tables VII-IX.
Multicollinearity symptoms may occur if the coefficient correlation is more than 0.8.
In Tables V-VI, it can be seen that none of the variables, among the independent
variables, has a correlation coefficient that is 0.8. Based on these results, we can
conclude that the first, second and third models shown no multicollinearity problem.
4.3.2 Heteroskedasticity (Table X). Breusch-Pagan results for Shariah and
conventional banks show that the first, second and the third models have probability
a chi-square of 0.00, the smaller value of 5 per cent (0.05). Based on the statistical
results, it can be concluded that these models contain heteroskedasticity. Violations of
this assumption can be fatal, so to overcome this problem, generalized least square and
robust standard error tests will need to be conducted (Gujarati, 2009).
4.3.3 Autocorrelation. From Table XI, it can be concluded that in this study, there is
a problem of autocorrelation in the model.
From Table XI for Shariah and conventional banks, we know that the error of period
t is influenced significantly by the previous period because probability of error is less

No.
1
2
3
Table VI.
Model decision

Model
Intermediation
Fee-Based
Service
Efficiency

INT
BUS
SIZE
NLEA

0.000
0.999

0.000

FEM
PLS

0.000

0.875

REM

Result

INT

BUS

SIZE

NLEA

1
0.39
0.07
0.34

1
0.35
0.09

1
0.13

FEE

BUS

SIZE

RISK

1
0.06
0.58
0.00

1
0.35
0.00

1
0.01

Source:: Output Eviews

Variable

Table VIII.
Second correlation
model matrix

Probability
(Hausman)
Test

Source: Output Eviews

Variable

Table VII.
First correlation
model matrix

Probability
(Chow)
Test

FEE
BUS
SIZE
RISK
Source: Output Eviews

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than 0.05. Based on the statistical results, we can conclude that this model contains
autocorrelations. Violations of this assumption can be handled by generalized least
square test (Gujarati, 2009).
4.4 Result (Table XII)
Based on the results of the first model estimation (FEM), the value of the BUS coefficient
is 0.164. The interpretation of these results is the relationship between the BUS variables
with the level of intermediation that is positive, and if banks are Islamic, then the
average will have higher levels of intermediation at 0.164 per cent compared to
conventional banks. Tests of significance showed variable results for BUS with a
probability of 0.000 (significant at the 1 per cent level). Based on these results, the
decision was to reject H0, and the BUS variables has a significant influence on the level
of bank intermediation which is common in Indonesia (Table XIII).
Based on the results of model estimation (pooled least square), the value of the BUS
variable coefficient is 0.011. The interpretation of these results is the relationship
between BUS variables with the proportion of fee income to operating income being
positive, and if banks are Islamic, then the average fee income-to-total operating income
proportion is higher at 0.011 per cent compared to conventional bank. Tests of
significance showed variable results for BUS with a probability of 0.004 (significant at
the 1 per cent level). Based on these results, the decision was to reject H0 and BUS
Variable

EFF

BUS

SIZE

RISK

EFF
BUS
SIZE
RISK

1
0.47
0.00
0.12

1
0.35
0.00

1
0.01

Source: Output Eviews

No.

Model

1
2

Intermediation
Fee-based
service
Efficiency

Value

Probability

666,756
1,089,490

0.000
0.000

Heteroskedasticity
Heteroskedasticity

1,169,549

0.000

Heteroskedasticity

Model

1
2
3

Intermediation
Fee-based service
Efficiency

Source: Output Eviews

Probability
0.001
0.000
0.000

305

Table IX.
Third correlation
model matrix

Result

Source: Output Eviews

No.

Islamic
bank vs
conventional
bank

Table X.
Breusch-pagan LM
test

Result
autocorrelation
autocorrelation
autocorrelation

Table XI.
Autocorrelation

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variables has a significant influence on the fee income-to-operating income proportion

(Table XIV).
Based on the results of the third model estimation (REM), the value of the BUS
coefficient is 0.756. The interpretation of these results is the that relationship between
the BUS variables and inefficiency is positive, and Islamic banks will have a higher level
of inefficiency compared to conventional commercial banks. Based on these results, the
decision was to reject H0 and the mean BUS variables have a significant influence on the
efficiency of the bank.
4.4.1 Intermediation comparison. In Indonesia, the Islamic banks intermediation
level is higher than that of conventional bank. This is consistent with research
conducted by Beck et al. (2013)) and also by Faye et al. (2013)). The high level of
intermediation occurs because Islamic interbank money market instruments of Islamic
banks are still undeveloped and unstable. Interbank money market instruments are
currently still using interest/usury in its products, causing difficulties for Islamic
interbank money market to create a similar product according to Shariah (Wahyudi
et al., 2013). The cause of difficulty of Islamic banks in managing excess or shortage of
liquidity is because these banks rely on core deposit as the main source of funding.

Variabel

Table XII.
First model
estimation

C
BUS
SIZE
NLEA
EFF

C
BUS
SIZE
RISK

Probability

0.730
0.164
0.010
0.043
0.706

0.000*
0.000
0.000*
0.000
0.009*

Hypothesis

Coefficient

Probability

0.259
0.011
0.018
0.096

0.000
0.000*
0.000*
0.08***

Notes: * Significant at 1%; **significant at 5%; *** significant at 10%

Variable

Table XIV.
Third model
estimation

Coefficient

Notes: * Significant at 1%; **significant at 5%

Variable

Table XIII.
Second model
estimation

Hypothesis

C
BUS
SIZE
RISK

Hypothesis

Coefficient

Probability

0.162
0.756
0.033
1.982

0.038
0.000*
0.000*
0.040*

Notes: * significant at 1%; ** significant at 5%; *** significant at 10%

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Besides undeveloped Islamic interbank money market conducted by Islamic banks,

regulatory factors in Indonesia are also more supportive of higher intermediation. Bank
Indonesia Regulation No. 15/7 / PBI / 2013 (Bank Indonesia, 2013a, 2013b) sets
loan-to-deposit ratio of conventional banks in the range of 78-92 per cent to maintain the
liquidity of conventional banking in Indonesia. Meanwhile, setting the distribution of
funds for Islamic banks is not conducted because Bank Indonesia does not set an upper
limit for financing-to-deposit ratio for Bank Indonesia to maintain higher growth of
Islamic banks.
4.4.2 Fee-based service comparison. Islamic banks have higher service activity than
conventional banks (Beck et al., 2013). Observations of Faye et al. (2013)) also found that
in countries in North Africa, Islamic banks have a business that is more diversified
compared to conventional banks. Islamic banks cannot lend money directly to
customers because lending money directly and request yield is usury. Due to the
limitations of Islamic banks in channeling funds directly, these seek alternative revenue
by increasing revenue services to improve profitability.
4.4.3 Efficiency level comparison. The level of efficiency is higher in conventional
banks than Islamic banks. It is caused by a condition of lack of standardization in the
financing contract. Although Islamic banks in Indonesia have a long history, these are
still young when compared with conventional banks. The first factor that causes
inefficiency in Islamic banks in Indonesia are relatively young, because of which these
do not have enough customers to achieve economies of scale. Because of the relative few
years, Islamic banks also have a lack of human resources which is considered to be of
high competence in Islamic banking; thus, Islamic banks have not been able to compete
in terms of efficiency with conventional banks. The second factor is the complexity of
the contract used by Islamic banks. Each contract is different from one customer to
another customer. Aqd/Contract used usually plated to avoid the prohibition in Islamic
finance practice.
4.4.4 The impact of bank size to intermediation level, fee-based service activity and
efficiency. Bank size will significantly and positively influence the level of bank
intermediation. Banks that have more assets will have a larger network and also greater
financial strength so that they can carry out their promotion. Banks with total assets
greater will have ability to participate in long-run and large projects. Banks that have
larger total assets are at an advantage because these can get the trust of the community.
In terms of funding, large banks will rely more on wholesale funding than small banks
(Bonfin and Kim, 2011). Large banks have easier access to search the core deposit
funding, while small banks only conduct traditional financing. With so many
alternative funding options owned by the big banks, it is no longer necessary to rely on
core deposits, so the intermediation ratio can be improved and liquidity risk can be
minimized.
Meanwhile, the size of the bank also has a positive relationship with the activities of
fee-based service. Banks that have greater assets will have technology that can increase
service revenues. In addition to the use of technology, larger banks will be established
and specialized and human resources are more adequate than those of smaller banks.
This is in alignment with researches conducted by Shahimi et al. (2006)) and also Rogers
and Sinkey (1999) which state that the larger the banks, the more ready they are to adopt
new technologies.

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In terms of efficiency, there is a negative relationship between the levels of efficiency

in Indonesian banks with the bank size. Large banks in Indonesia have a complex
business model and wide scope of business geographically. Opening branches in rural
investment may lead to inefficiencies for larger banks because the cost which occurs in
the countryside is not comparable with the output received by the bank. In addition to
the amount of the investments made by banks, asset maintenance costs such as ATMs,
telecommunications networks and maintenance branch offices, as well as personnel
costs, are also higher than small banks.
4.4.5 Inefficiency impact to intermediation level. Banks that have a higher level of
efficiency will have a better intermediary level compared to banks with low efficiency.
More efficient banks are able to suppress the overhead cost so that the component
determining the lending rate is lower. With a low-base lending rate, the interest charged
to borrowers will be lower. In case of Islamic banks, although not using interest, the
impact of efficiency of sale is directly on profit margins. The margin required by
efficient Islamic banks will be lower than that required by inefficient Islamic banks.
The results of this study can prove the statement in a study conducted by Chortareas
et al. (2012) which state that a high spread or net interest margin (NIM) is a picture of
financial system inefficiency. When NIM is too high, it not only influences the customer
to not keep the funds held in the bank as the returns are too low, but also caused
investors to not want to borrow funds because the interest expense paid is too high.
4.4.6 The impact of non-loan-earning asset to intermediation level. Non-loan-earning
assets work as a proxy of the opportunity cost of the bank. As an institution which
collects funds, banks have the option to lend the money to the public or conduct
transactions in the capital market such as buying government bonds to diversify
revenue. In the case of investment, the bank will certainly consider the risks, payback
period and also the return that they will receive. Banks that have excess liquidity and
low intermediation capabilities will invest in financial securities in the capital markets
such as government or corporate bonds.
4.4.7 The impact of credit risk on fee-based service and efficiency. Based on the results
of the model estimation, it found no significant relationship between the variables of
credit risk and fee-based service activities. It means that banks which have risk
exposure of low credit services do not necessarily have higher incomes than the banks
which have exposure to higher credit risk. The results of this study are not consistent
with studies conducted by Shahimi et al. (2006) which state that the credit risk has a
significant influence on the bank services income.
The relationship between risk variables and efficiency align with bad luck
hypothesis proposed by Berger and DeYoung (1997). According to Berger, bad credit
can cause a decrease in the bank efficiency due to external factors such as economic
shocks that cause a decline in economic conditions so that the debtor is experiencing
difficulty in repayment. With bad credit, the bank must incur additional costs associated
with the settlement of the bad credit problems. Additional costs incurred by the bank
include the cost of monitoring (monitoring costs), the cost of credit selection (screening
costs), the cost of caring for the sale of collateral and guarantees (maintenance costs and
appraisal costs) and costs associated with the settlement of legal issues (Abd Karim
et al., 2010). In addition, banks also suffered losses from decreasing immaterial good
such as bank image that failed to manage credit risk.

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5. Conclusion
This study aims to conduct a comparison study about intermediation, fee-based service
activity, efficiency, the impact of control variable (size, inefficiency and nonloan-learning asset) on the intermediation level, the impact of control variable (size,
credit efficiency and credit risk) on fee-based service and the impact of variable control
(size and credit risk) on efficiency between Islamic and conventional banks in Indonesia
from 2011 to 2013. It employs quantitative analysis using secondary data of 39
conventional banks and 8 Islamic banks.
The result shows that there are differences in the level of intermediation between
Islamic banks and conventional banks in Indonesia for 2011-2013. Islamic commercial
banks have an intermediation level higher than conventional commercial banks.
Moreover, there are also differences in the level of efficiency between Islamic banks and
conventional banks. Islamic banks have worse efficiency levels compared to
conventional banks. Furthermore, the control variables of non-earning assets and
inefficiency loan are negatively related to the level of bank intermediation in Indonesia,
while the variable size is positively related to the level of the intermediary banks in
Indonesia from 2011 to 2013. Size control variables are positively related to fee-based
service activities of commercial bank in Indonesia, while the risk variable has no
significant relationship with the activities of fee-based services in Indonesia. Last, the
size and risk control variables are positively related to the inefficiency of commercial
banks.
Implication
Conventional banks have a lower intermediation level compared to Islamic banks that
have a better intermediation activity system. Fee-based service activity of Islamic banks
must be varied but not be of conventional mirroring. The disadvantages of Islamic
banking financial engineering include minimum creativity of financial product which is
originally Shariah, and not conventional modification. Islamic banking should renew
the quality of their operational systems to conduct business more efficiently. Investment
on competent human resources in Islamic banking will bring good efficiency and
improve profitability performance.
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Corresponding author
Permata Wulandari can be contacted at: permata.w@ui.ac.id

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