“Indonesian Islamic banks: A review of the financial state before and after the COVID-19 pandemic”

Banking plays an important role in business and economic growth. However, since a couple decades ago, there have been issues with efficiency and performance. This paper aims to examine Indonesia’s Islamic banking performance through non-parametric production efficiency analysis before and after the COVID-19 pandemic, 2010–2021. This study differentiated between different dimensions of Indonesia’s Islamic banks (IIB) finance and non-finance aspects, as well as investigated the relationships between these dimensions of finance, including assets, deposits, equity, financing, and income, and non-financial variables, namely employees and offices. Non-parametric analysis, with the input-oriented variable constant return to scale (CRS) and returns to scale (VRS) models as a framework, data envelopment analysis (DEA) is used to calculate the IIB of overall, pure, and scale efficiency. However, the resources of technology IIB management are lacking, as well as macroeconomic and environmental effects. This study found that IIB operational needs to enhance investment in technology beyond the office. This means that the number of offices has a smaller impact on enhancing deposits and revenue. Technology investment has a crucial role in enhancing IIB equity, income, and innovation service. As a result, IIB managers and policymakers must improve their efficiency scores in order to increase competition and innovation. Furthermore, IIB needs to increase and spend their assets and experience to enhance technology, which significantly affects efficiency.


INTRODUCTION
The Islamic finance sector has expanded and is now present in almost every country in the world over the past 20 years. This sector includes banking, the capital market, and insurance. With over USD 260 billion in assets, it has developed more than 300 global Islamic funds and institutions across the region, with the majority of Muslim people and Western countries (Junaidi, 2022). The COVID-19 pandemic hurts the banks' finances and profitability. In most countries worldwide, the Central Bank attempts to solve economic downturns by enhancing the banking intermediary role to transfer funds from depositors and borrowers. It is crucial for the real economy and the financial stability of the area. However, borrowers (e.g., banks) need to be concerned about banking efficiency, price stability, financial structure, and operational system. Commonly, the efficiency concept refers to how the input variables stimulate the outcome variables. In the banking sector, the concept of efficiency is how the funds obtained from third parties are allocated to investment and financing. Besides contributing to bank profitability and performance, banking efficiency and financing have contributed to economic growth.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
During the COVID-19 pandemic, banks need stability and efficiency to support the financial operation and system. The Islamic finance sector has expanded significantly over the past 20 years and is now present practically everywhere in the world. This sector includes banking, the capital market, and insurance. However, some studies concluded mixed result of Islamic bank efficiency.
The impact of return on financial performance on Islamic banking profitability was studied by Le et al. (2022). The result of this study is that banking profitability has decreased during the COVID-19 pandemic than before. It also indicates the relationship between the government, banking system, and resources on banking performance. Furthermore, Saleh et al. (2020) concluded that the financial performance and inflation play an important role in influencing non-performing loans in the GCC countries. Prior studies also recommended enhancing methods and research models such as social science and statistical methods (parametric and non-parametric) to provide useful information.
Previous research revealed that Islamic banks may endure a crisis. However, the Middle Eastern and Asian regions have also encountered the Islamic bank with a poor level of efficiency (Rosman et al., 2014). This means that profitability and capitalization play an important role in efficiency. Just like in Indonesia, in particular, three years ago, the rise of deposits, workers, operating costs, and offices had a negative impact on the increase in income and financing (OJK, 2021). Although, Islamic banks are better than conventional banks, lack of product and service innovation has contributed to Islamic bank inefficiency (Johnes et al., 2014). Furthermore, high operational expenses and unproductive employees also have a significant contribution to Islamic bank efficiency (Wanke et al., 2019). The scale of Islamic banks in Southeast Asia allows for greater efficiency in producing tiny amounts of output from little amounts of input (Basri et al., 2018). Moreover, the efficiency of Islamic banks has improved with time. Despite operating at a size that is generally ideal, Islamic banks must improve their efficiency, particularly with regard to their ineffective managerial resources. Islamic banks should increase the quality of assets due to the positive effect on their efficiency (Kamarudin et al., 2017 Hence, the OTE can be regarded in this study, which achieved the DMU operation in economies and diseconomies. As a result, it is advised to consider the consequences of the VRS theory and score. SE enables us to prove the transformation between two approaches to efficiency. This study aims to address this issue and add to the knowledge in both the financial and non-financial sectors, which influence bank performance toward examining Islamic banks' performance regarding economic (e.g., assets, deposits, equity, financing, and income) and non-financial fields (e.g., employees and offices) effects.
Despite Islamic banking have significantly grown worldwide, few studies have been given to the financial and operational performance. Specific research to evaluate banking efficiency has become crucial since the 1990s (Mateev et al., 2022). It is useful to managers, stakeholders, policy-makers, and regulators, as well as researchers. Through a review and summary of prior studies, which were correlated to the banking efficiency concept, the research hypotheses of the current study before and after the COVID-19 pandemic are set. In some parts, the COVID-19 pandemic has caused a banking performance downturn. Hence, Islamic banks' concerns about the operational efficiency. However, there is little empirical research on the effectiveness of Islamic banking operations in this environment, and the literature and earlier studies on bank efficiency are widely addressed in relation to the comparison between Islamic and conventional banks. The efficient frontier of banks will directly enhance profitability levels, and higher amounts of finance will be available, theoretically constrained by technical and allocative efficiencies. A bank will attempt to minimize the operational and service costs (cost-efficient), which is correlated to enhancing their income (revenue efficiency) and profit (profit margin).
The aims of this study are to examine Indonesia's Islamic bank (IIB) efficiency and performance with regard to economic (e.g., assets, deposits, equity, financing, and income) and non-financial fields (e.g., employees and offices) effects.
The results from a recent study tend to help academicians, practitioners, and policy-makers obtain a better view of the effect of inputs on output bank performance. Additionally, it makes a number of theoretical and useful contributions. First, the data envelopment analysis (DEA) method is used to connect this study to the financial and operational context. Second, the field of Islamic banking is restricted, with the exception of literature and studies on the impact of deposits, workers, expenses, and offices on financing and income. The outcome of this study reveals the critical function of input variables and provides a thorough understanding of their impact on output variables, which has been overlooked in earlier studies.
H1: Islamic bank assets, deposits, employees, and offices positively influence total financing and revenue.
H2: Islamic bank assets, deposits, equity, and employees positively influence total financing and revenue.

DATA AND METHODOLOGY
Data were retrieved from the banks' databases. 14 Indonesian Islamic banks (IIB) (see Table 1) for 2010 to 2021 have been considered. This study was conducted using the input and output approach referred to by Demirguc-Kunt et al. (2021) to ensure a fair distribution of inputs and outputs in order to maintain the DEA. In this study, the inputs are the number of employees, offices, total deposits, and total operational expenses, and the outputs are total financing and revenue.
The production approach was pioneered by Benston (1965) Islamic banks can be seen as financial intermediaries, with their main function being the acquisition of funds from depositors in order to make loans to other people. So, in this study, the intermediation strategy is employed.
By converting deposits into income-producing assets rather than service providers and lenders, the intermediation strategy is applicable to the interaction between investors and savers. Deposits, along with labor and physical capital, are classified as inputs, and the output measure is based on the sum of all loans, securities, and deposits. Xu and Zhou (2020) proposed the intermediation approach concerning total assets, workers, operating expenses as input, and deposits as intermediation productivity. This method defines output as interest revenue, non-interest income, and on-performing loans. When used to an Islamic bank, this strategy is more appropriate. In fact, it is sometimes asserted that an Islamic bank is a joint venture company, in which members share in the profit, loss, and risk. The participation in business and the use of finances based on profit-and-loss sharing principles are the fundamental tenants of the Islamic financial system. Furthermore, the intermediation strategy, according to Chen et al.   Islamic bank 2010  2011  2012  2013  2014 2015 2016 2017 2018 2019 2020 2021   SCB  11  11  11  11  12  12  13  13  14  14  14  12  SBU  23  24  24  23  23  22  22  21  20  19  19  21  SRB  150  155  158  163  163  163  166  167  165  164  167

RESULT
This study shows the correlation between the input and output variables (see Table 2). Together with the Pearson's correlation coefficient between the input and the output, the averages of the ratios for various ranges show a positive correlation.
This study examines the effectiveness of Indonesian Islamic banks (IIB) under the CRS and VRS hypotheses. Table 3 shows that the mean OTE and SE scores have changed across all banks. Table 3 makes it evident that the IIB OTE's mean value over the study period was 82.13%. Overall findings indicate that all banks could have saved 17.87% by using comparable input resources to create the same number of outputs. As a result, the IIB management's resource decomposition is poor. The PTE can be evaluated using VRS technology, which allows for an average PTE assessment of 90.83%. This means that if IIB had adopted the most efficient technology, they could lower their input by 8.17% while maintaining a constant level of output. Table 3 shows that IIB has very poor resource management based on current technologies. In fact, a small variation in this study indicates factors like macroeconomic and environmental variables that are out of the IIB's control. Table 3 further shows that the average SE index for all institutions is ap-

DISCUSSION
This study confirmed that inputs (e.g., employees, offices, total deposits, and total operational expenses) have significantly and positively influenced outputs (e.g., total financing and revenue). Because of this, it is preferable to compare the profit efficiency of the Indonesian Islamic banking sector to cost efficiency in order to determine whether a full idea of revenue efficiency exists there. It discusses how to distinguish between the cost, revenue, and profit efficiencies, three main types of efficiency.
The recent study has shown that OTE, PTE, and SE average scores have declined since 2010. This outcome demonstrates Indonesia's Islamic banks' declining performance. The IIB's failure to operate at the appropriate scale was the primary cause of technological inefficiency. As a result, they had to cut back on their inputs to get the best scaling. It shows that, despite the scale effects, the banks' management was unable to effectively manage costs and leverage a variety of inputs to achieve outputs. The viability and creativity of IIB's products and services, specifically their ability to pur- Note: Input = Total asset, deposits, equity, output = total revenue and financing.
sue their roles as a middleman between depositors and borrowers, will be determined by their capacity to meet the efficiency and performance requirements. Due to their search for Sharia-compliant institutions, Indonesian Muslims' critical reasons have significantly influenced the growth of deposit banking.
The present study contributes to the theory of the non-parametric approach (DEA) in three ways. First, this study differentiated between different dimensions of IIB finance and non-finance aspects. It investigated the relationships between these dimensions of financial (e.g., deposits, expenses, financing, and income) and non-financial variables (e.g., employees and offices). The results of this study supported the relationship between input factors and output variables, illuminating the effectiveness of the IIB. Second, this research showed that, besides financial variables, employees and offices are the essential key points of IIB economic efficiency and performance. Past researchers did not investigate the relationships between these variables. The findings provide a theoretical basis for future research. Finally, this study reinforces the data envelopment analysis (DEA) to examine Islamic bank efficiency. It also strengthens the relationships between the variables observed and the Islamic banking system.
In conclusion, the research raises a number of suggestions for bankers and decision-makers to increase efficiency. First, although outperforming, the industry as a whole still has worse efficiency scores than IIB. Greater innovation and competition may result in increased efficiency. In order to operate more effectively, IIB must also expand and invest in its capabilities, resources, Second, by easing restrictions, officials should take significant action to facilitate the admission of foreign banks. It might increase competition, which would increase the banking sector's overall efficiency. Most notably, one of the crucial operational system indicators for improving the interaction between customers, staff, and this banking system is the role of the shariah supervisory board (SSB) and financial services authority (OJK). With well-defined regulation and supervision mechanisms, which can be employed as an operating system fundamentally distinct from conventional banking, regulators are expected to play a crucial role in this respect. Additionally, a thorough tool and diligent coordination are essential components that promote Islamic banking's viability and success in competing in both domestic and international markets.

CONCLUSION
This study's goal was to investigate the effects on Indonesian Islamic banks' assets, deposits, offices, and equity, as well as other input and output variables (e.g., financing and revenue). An analysis of the efficiency of Islamic banks during 2010-2021 using an intermediary approach showed that Islamic banking operations have a strong correlation with economic development in some regions. The efficiency and situational variables of the Islamic banking system, including businesses, investors, governments, and depositors or borrowers, take the stability of the system seriously. Investors and academics in both broad and narrow disciplines have therefore paid attention to Islamic bank capital and financing. The need to improve the financial efficiency of Indonesia's Islamic banks is becoming more and more urgent. Additionally, it demonstrated that Indonesian Islamic banks' operational efficiency has improved since the COVID-19 epidemic compared to both before and during the pandemic. The operations of Islamic banks in Indonesia are also improved in terms of deposits, employees, expenses, and offices to decrease operating expenses while developing technology applications and investing in productive sectors.
The study does have certain restrictions. First, as this study was conducted inside the realm of Islamic banking, it is not necessary to generalize the findings. To support a better conclusion, future studies should use traditional banks, larger sample sizes, and additional regions and geographical locations. Second, it only considers the intermediation approach. Hence, future research needs to investigate the performance of DMUs under the intermediation and production approach and generate the inputs and outputs. It would provide a further understanding of the robustness of the results presented in the study. Finally, despite the fact that the research's proposed input variables were validated as useful, they were only applicable to Islamic banks with preliminary research. Future research must pay close attention to the interaction between financial and non-financial circumstances. To determine whether staff members and the number of offices have a good impact on bank performance, it is also necessary to find out whether Islamic bank management are aware of the significance of this relationship.