Technical Efficiency of Rural Banks in East Java: A Two-Stage Data Envelopment Analysis Approach

Abstract

This study aims to measure the technical efficiency of Rural Banks (BPR) in East Java Province during the period 2021–2023 and to identify the determinants of efficiency using a two-stage approach. The research employs a quantitative method with secondary data obtained from financial reports published by the Financial Services Authority (OJK). In the first stage, efficiency scores are calculated using an input-oriented Data Envelopment Analysis (DEA) under the Variable Returns to Scale (VRS) assumption. In the second stage, a Tobit regression model is applied to examine the influence of internal bank factors on efficiency scores. The findings reveal that only 6 out of 20 BPRs consistently achieved full efficiency during the observation period, while the remaining banks exhibited varying levels of inefficiency. The second-stage analysis indicates that Capital Adequacy Ratio (KPMM) and Return on Assets (ROA) significantly influence efficiency, whereas Non-Performing Loans (NPL) and bank size do not show a significant effect. These results suggest that internal financial performance plays a crucial role in improving bank efficiency. This study contributes to the literature by providing empirical evidence on the efficiency dynamics of rural banking institutions in developing regions and offers policy implications for improving financial performance and operational efficiency in the rural banking sector