The influence of asset liability management on efficiency in rural banks : the moderating role of interbank borrowing fund

Abstract

Asset and liability mismanagement has resulted in many rural banks in Indonesia facing efficiency problem and forcing to shut down their businesses. High non-performing loan level, limited funding from deposit sources, and low liquidity level have exposed many rural banks in Indonesia to credit risk, interest rate risk, and liquidity risk problems. Moreover, due to difficulties in obtaining deposit fund, rural banks in Indonesia have resorted to using interbank borrowing fund as an alternative funding source. The interbank borrowing fund utilisation may affect the relationship between rural banks asset liability management and efficiency. Thus, this research aims to examine not only the rural banks asset liability management influence on efficiency but also to investigate the interbank borrowing fund role as a moderator in the relationship between asset liability management and bank efficiency. The study sample comprises 330 rural banks in all provinces of Indonesia over the period from 2014 to 2018. A two-stage analysis is applied to analyse the data. The first analysis stage employs Slack Based Measure-Data Envelopment Analysis (SBM-DEA) to estimate the efficiency of rural banks using the intermediary approach. The second analysis stage uses the Tobit regression analysis. This regression analysis estimates not only the relationship between asset liability management and efficiency but also measures the interbank borrowing fund role as a moderator variable. The SBM-DEA analysis results reveal that most of the rural banks in Indonesia are not efficient. The Tobit regression analysis findings show that liquidity risk has a negative and significant influence on efficiency, while interest rate risk has a positive and significant influence on efficiency. Nevertheless, credit risk has no significant influence on efficiency. The findings also reveal that interbank borrowing fund moderates the relationship between liquidity risk and efficiency as well as the relationship between interest rate risk and efficiency. However, this moderator variable does not moderate the relationship between credit risk and efficiency. The research findings serve as reference for rural banks not only in managing their risks but also in utilizing their interbank borrowing fund. The findings also provide useful insights on best practices for the management of rural banks in dealing with operating inefficiency issues. Besides, the findings become reference for regulator in setting strategies and policies that can overcome the risk and inefficiency problems experienced by rural banks. .