Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


Competition between large banks and small banks in determining net interest margin: A game theory approach

Author(s): Agus Herta Sumarto, Viverita, Zaafri Ananto Husodo

This paper analyzes the competition between small and large banks in estimating the optimal net interest margin (NIM) in the Indonesian banking industry. This study applies the game theory of dynamic games of an incomplete information framework based on the Ho and Saunders (1981) model. We compile data from 82 banks (14 large banks and 68 small banks) from 2008 to 2017. Our estimation from Game Theory approach shows that the optimal NIM for large banks is 6.78 percent while their actual NIM is 5.82 percent. As for the small banks the optimal (actual) NIM is 7.32 (6.18) percent. The findings indicate that large banks and small banks still have the opportunity to increase their NIM to the optimal level.

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