Economies of scale and a process for identifying hypothetical merger potential in Indonesian commercial banks

The aim of this study, through the estimation of a cost function, is to estimate the scale economies and scale and X-inefficiencies of commercial banks operating in Indonesia with a view to identifying hypothetical mergers that could deliver significant cost savings. Economies of scale are typically only found for the largest and smallest banks, with the industry's estimated scale inefficiency averaging 4.4% and the X-inefficiency averaging 23.1%. The main cost reductions identified would result from mergers within the State-owned grouping, where estimated savings of up to Rp 16.7 billion (US$ 1.8 billion), 34% of total costs, would have been secured over the sample period 2004-09. A merger between two Non-foreign Exchange banks would also have proved beneficial.