THE EFFECT OF OPERATIONAL INEFFICIENCY ON ASSET PERFORMANCE IN RURAL BANKING

Abstract

ABSTRACT

Purpose: This study challenges the dominant 'economies of scale' paradigm, a theory suggesting that larger firm assets should lead to greater financial performance. Within the rural banking sector, this assumption often drives high-risk strategies focused on asset growth, leading to a "bigger is better" fallacy. We aim to (1) empirically test this direct asset-performance link and (2) investigate the critical moderating role of operational inefficiency in determining whether assets function as a resource or a burden.

Methodology: Using panel data from Indonesian rural banks (BPR) from 2023-2024, this study employs Moderated Regression Analysis (MRA). Financial Performance is measured by Return on Assets (ROA), firm size by the Natural Logarithm of Total Assets (LNASS), and operational inefficiency by the Operating Expense to Operating Income Ratio (BOPO).

Findings: The findings reveal a fundamental flaw in the 'scale' theory. First, the direct effect of Assets on ROA was found to be statistically non-significant ($p=0.07$) refuting the 'bigger is better' hypothesis. Second, and most critically, the results show a strong and significant 'pure moderation' effect ($p=0.001$). Operational inefficiency (BOPO) acts as the decisive contingency factor. The analysis reveals that assets only become a significant burden (negatively impacting ROA) when a bank is already efficient (low BOPO). Conversely, for highly inefficient banks (high BOPO), asset size becomes irrelevant as performance is already compromised by mismanagement.

Originality/Value: This research provides a crucial Early Warning System (EWS) for bank management and regulators. It demonstrates that asset size is a poor, and often misleading, indicator of bank health. The study shifts the academic focus from 'growth' to 'management,' proving that operational inefficiency is the non-negotiable factor that dictates the value and risk of asset accumulation, ultimately separating profitable banks from those on the path to ruin.