The Analyis of the Efficiency of BPR-S: Production Function Approach Vs Financial Ratios Approach

Indonesia has long history of microfinance (MFI) services in both rural and urban areas. Access to financial services has allowed many low-income families to make significant progress in their own efforts to escape poverty. The government supports the growth of MFI services through many instruments, such as regulations, subsidy, and directed credit policies. Currently, there are two broad classification of microfince institutions in Indonesia, i.e., bank-MFIs such as BRI's Unit Desas and rural banks (Bank Perkreditan Rakyat-BPR), and non-bank MFIs such as credit cooperatives (Koperasi), Islamic microfinance (such as Baitul Maal wat Tamwil, BMT), rotary-club saving (arisan), etc. As a business unit, the MFIs must follow the principle of efficiency to survive. The objective of this study is to evaluate the efficiency of one type of the MFI in Indonesia, namely Syariahrural banks (BPR-S). The common approach to measure the level of efficiency of a business unit used by management is financial approach, such as ratio of operating expenses to operating income. However, economists normally use production function approach or its derivation to measure the efficiency. We are comparing the two approaches to evaluate the efficiency levels of the BPR-S. The results show that the efficiency levels of the BPR-S are generally operating in a good efficiency. Efficiently ratios of BPR-S during the sample period of time have been mostly above 90%. The efficiency based on the financial ratios confirms the finding from the production function approach.