Does competitive advantage mediate the effect of competency,innovation,and reputation on the performance of rural banks?

Abstract

BACKGROUND:

In the last few decades, the rural bank has a focus of both researchers and policy-makers as it plays a crucial role in promoting the welfare of lower-income groups in most of the underdeveloped and developing countries, including Indonesia. However, as the newly established micro-financing institutions, as compared to the well-established large-scale commercial banks in the country, these micro-financing institutions have been perceived to have a lower level of competitiveness and performance.

OBJECTIVE:

Thus, this study explores and analyzes factors of core competency, innovation, and reputation in determining the competitiveness and performance of the rural banks (Bank Perkreditan Rakyat - BPRs) in Aceh, Indonesia. It also attempts to empirically investigate and analyze the mediated effect of competitive advantage on the influences of core competency, innovation, and reputation on performance of the BPRs in the country.

METHODS:

350 employees at the 16 BPRs in 7 districts in Aceh province, Indonesia were selected as respondents of the study using the stratified random sampling technique. The study used the structural equation modeling analysis to examine the interrelationships among the variables, to answer the objectives of the study.

RESULTS:

The study found a positive influence of the core competency, innovation, and reputation on the BPRs’ competitive advantage. Except for the BPRs’ reputation, all variables positively affected the BPRs’ performance. Finally, the study found a significant partial mediated effect of competitive advantage on the relationship between core competency and innovation to the BPRs’ performance and a significant full mediated effect of competitive advantage on the relationship between reputation and the BPRs’ performance.

CONCLUSIONS:

These findings imply that all efforts to enhance the BPRs’ performance should be focused on the improvement of competitive advantage based on enhancing the competency, innovation, and reputation of the BPRs.

Keywords

Core competency innovation reputation competitive advantage rural bank

Harmani Harun is a Ph.D. Scholar in Management Science at the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. He is a senior lecturer at the Universitas Malahayati, Bandar Lampung, Indonesia.

Nurdasila Darsono is a Senior Lecturer at the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. She earned her Ph.D. from Universitas Padjajaran, Indonesia.

A. Rahman Lubis is a Professor in Management Science at the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. Currently, he is the Head of the Ph.D. Program of Management Science, Universitas Syiah Kuala, Indonesia. He earned his Ph.D. from Universiti Putra Malaysia (UPM).

Muslim A. Djalil is a Senior Lecturer at the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. He earned his Ph.D. from Universitas Padjajaran, Indonesia. His main research areas include Islamic banking management and performance measurement.

Syafruddin Chan is a Senior Lecturer at the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. He earned his Ph.D. from Universitas Padjajaran, Indonesia. His main research areas include Marketing and Applied Quantitative Management Sciences.

1 Introduction

The banking industry plays a crucial role in the economy, considering its function as an intermediary institution that channels funds from the surplus units to the deficit units in the financial sector [1]. Due to its importance, extensive previous studies have investigated the performance of the banking industry and its contribution to promoting the economy worldwide, including Indonesia. In addition to the large-scale of commercial banks, the presence of rural banks in Indonesia in the last few decades has further strengthened the contribution of the banking sector to the rural community development [2], as they provide microcredit to the small and medium enterprises (SMEs).

In Indonesia, the People’s Credit Bank (Bank Perkreditan Rakyat – BPR) is one of the well-known rural banking institutions, which was established in 1988 to cater the needs of capital for small scale business entity. Hitherto, there have been 2,296 BPRs in the Indonesian economy, where 5.75% of them have been operated based on Islamic principles. In 2017, the BPRs only captured 4% (or IDR26,881 billion) of the banking market share nationwide (Bank Indonesian Report, 2018). Due to its small-scale banking institution, the BPRs have faced difficulties to realize their profit target. As compared to the commercial banks, the BPRs offer a higher interest rate for their microcredit that leads their operations to become inefficient and encounter higher risk [3]. The regulation of the Central Bank of Indonesia that allows the presence of foreign banks in the country to capture the micro-market niche has led the BPRs to face greater competition with the commercial banks nationwide. Additionally, the lower corporate competency and lacking of capital have caused the lower innovation and image of the BPRs, which in turns adversely affected their competitive advantages and performances as compared to their commercial banks’ counterparts. Considering this phenomenon and the strategic role of the BPRs in rural community development, thus it is interesting to assess the competency, capital adequacy, innovation, and reputation of the BPRs and their effects on the BPRs’ competitive advantages and performances.

There have been many previous studies assessed the performance of banking institutions and their determinants both in the developed, emerging, and underdeveloped economies [4]. However, compared to the strategic position of rural banks than their commercial counterparts to promote rural community development, previous studies on the determinants of rural banking performance have been meager worldwide. There have been few studies investigated the critical factor for the success of the rural banks. For example, [5] review an extensive literature of the external environment determining the success of rural banks. In their study, [5] suggest that rural banks should adjust their internal components’ function and structure to survive the external changes. Additionally, banking product diversification, creation of market-oriented institutions, strong social and human capital, learning and innovation, external markets, and external knowledge are deemed necessary for rural banking sustainability.

Meanwhile, [6] explores the effect of banking location and performance of urban and rural banks in Nigeria and found an insignificant influence of location on banking performance. [7] examine the effect of board size on the financial performance of urban cooperative banks in India. They found that board size does not affect banking performance. For the case of SMEs’ banking industry in China, [8] compare the comparative advantages of small banks to the large banks and their effects on loan performance. They found that the small and large banks have no advantage in providing loans to the small and medium enterprises (SMEs), implying the failure of small banks to maintain a strong relationship with the SMEs due to the hold-up problem resulting from relationship financing. Finally, [9] describe the competitive advantage and performance of the SMEs in Nigeria [9].

In the context of Indonesia, previous studies on the performance of banking industry have focused more on the effects of macroeconomics [10 , 12] and banking characteristics [1, 13] on profitability. Only limited studies have measured the performance of rural banks and their critical factors to success in Indonesia. In their study, [14] use the genetic algorithm method to comparatively estimate the profitability of commercial and rural banks in Indonesia. [15] explore the determinants of bank margins of the rural banks in Indonesian and documented that competition and diversification were the significant determinants of the rural banking performance.

On the other hand, the studies focusing on the management perspective and its effect on rural banking performance in Indonesia have only been conducted by [16, 17]. In their study, [16] investigate the importance of morality in rural banking credit assessments, while [17] investigates the influence of service quality and commitment on satisfaction and retention of customers of the rural banks in Makassar, Indonesia. To the best of our knowledge, none of the previous studies have investigated the importance of banks’ competency, innovation, and reputation of the rural banks on their competitive advantages and performances, while these factors, according to [5] are critical to the success of the rural banks.

Considering the lacking of empirical evidence on the effects of competency, innovation, and reputation on the competitive advantages and performances of the rural banks, thus this study intends to fill these gaps by exploring the effects of core competency, innovation, and reputation on the competitive advantages of rural banks in Indonesia, and consequently on their performances. Thus, this study is a pioneer to investigate the issue using structural equation modeling (SEM). The use of SEM analysis is not only able to measure the direct effects of banks’ competency, innovation, and reputation on the competitive advantage and performances of rural banks in Indonesia, but it is also able to measure the mediated effect of the competitive advantages on the relationships between banks’ competency, innovation, reputation, and performance of the rural banks in the country.

The findings of this study are hoped to shed some lights for the rural banking sector to enhance their competitive advantages on the basis of improving rural banks’ competency, innovation, and reputation. The findings of this study are also hoped to provide references for the rural bankers to improve their performance, focusing on the enhancement of their competitive advantages, banks’ competency, innovation, and reputation. For the policy-makers, particularly the financial services authority (Otoritas Jasa Keuangan – OJK), these findings could be used for policy formulation to provide a conducive environment for enhancing the contribution of rural banks to the community development in the country. Finally, the findings of the study would also enrich the existing literature on rural banking performances and their critical factors to success from the perspective of Indonesia.

The rest of the study is structured in the following sequences. Section 2 reviews the existing relevant literature on the investigated issue, while Section 3 provides the empirical framework of the study. Section 4 discusses the findings and their implications. Finally, Section 5 concludes the study.

2 Literature review

2.1 Banking performance

The Indonesian Law No. 7 of 1992 concerning Banking, as amended by the Law No. 10 of 1998 defines banks as business entities that collect funds from the public in the form of deposits and then distribute them to the public in the form of loans or other forms for the purposes of improving the community standard of living. Unlike the commercial bank that carries out its business activities either based on the conventional or Islamic principles by providing services in payment transferring (i.e., demand deposit, foreign exchange business, and insurance), the rural bank (BPR) in Indonesia is not allowed to provide such services. Due to its narrower activities than those of commercial banks, thus the measurement of rural banking performance is different from the commercial bank.

Rural bank performance is a complex issue [18, 19] define performance as the measurement of the success of personnel in realizing strategic goals in four perspectives, namely: finance, customer, process, and learning and growth. The performance of a bank that is considered to be good for management is not necessarily to be good as perceived by the owners and employees. This is due to the tendency of a bank manager to use his subjective perceptions rather than using criteria that are set following the bank goals. In short, the level of the bank’s performance is very much dependent on its approach, measurement, and the standards used.

The business performance, including the banking industry, is affected by human resources and capital-related managerial factors. These factors, inter alia, include competitive advantage [4], competency of the company [20], reputation or image of the company [21 –23], capital adequacy [24], and innovation of company [25 –28] both in its process, operation, and goods and services produced.

2.2 Competitive advantage

A successful bank always tries to recognize its competitors as best as it does customers. Successful bank gathers information about their competitors continuously. The competition analysis and evaluation help management to decide where to compete and how to determine the position to face competitors in each target market [4]. As an advantage over its competitors, the bank could gain its competitive advantage by delivering greater customer value through cheaper prices or by providing more benefits at a below-market price [26]. The competitive advantage of a bank exists when there is a harmony between the competencies that differentiates a bank and the critical factors for success in the industry which causes the bank to have a better performance than its competitors [4]. This implies that the greater the bank’s ability to utilize its competitive advantage, thus the greater the opportunity for banks to improve their performance.

2.3 Core competence

According to [29], core competencies are as collective learning within an organization, especially to coordinate a variety of production skills and integrate various technological paths. To have its core competencies, the bank must meet three main criteria, namely: (i) providing potential access to a broad range of markets; (ii) making a significant contribution to the benefits of the final product received by the customer; and (iii) making difficult for the competitors to imitate [30]. According to [20], there are two types of competencies, namely: functional (i.e., marketing, production, research, and development, etc.) and general management capabilities (i.e., growth management, diversification, and acquisition).

The above core competencies are among the important components for the bank to have its competitive advantage [31]. By having these core competencies, it does not only guide the bank’s strategic direction, but also greatly enhances its competitive advantage and performance [32]. Therefore, the bank’s core competency has an important role in strategic management to make the best use of its resources and enhance competitive advantage on the bank and consequently its performance [20].

2.4 Innovative banking services

Innovative banking services are the innovative program of the banks related to its process, products, and services. [33] define innovative banking services as a breakthrough related to new products. It is a broader concept that addresses the application of new ideas, products, or processes. Meanwhile, [34] define it as a mechanism for companies to adapt in a dynamic environment, thus required company to be able to create new thinking, new ideas, and offer innovative products to provide higher satisfying services to its customer. There are two concepts of innovative banking services that are innovation and capacity for innovative banking services. Innovation is the notion of openness to new ideas as an aspect of corporate culture, while the capacity for innovative banking services is the company’s ability to use or implement new ideas, processes or services successfully.

In his study, [25] states that innovation is one of the important sources of banking competitive advantage to respond the changes in the business environment. Making innovation as part of the bank’s culture would position the bank at the forefront of responding to ever-changing market dynamics. Consequently, the ability of the bank to innovate its services would have an impact on improving bank performance [25, 35]. The company could easily win the competition arises from the emergence of competing for products by innovation [34] that finally leads to the improvement of the company performance [25, 36].

2.5 Bank reputation

A bank reputation is an impression that arises in a person’s mind when they hear the name of a bank [37]. It is a result of a process where the customer has compared various attributes offered by the bank. The bank’s reputation is related to the four main issues: (i) how a bank has a moral towards its social environment; (ii) how a bank is managed properly; (iii) how the bank carries out its business activities for a better performance; and (iv) how a bank satisfies its customers [21]. The higher level of bank social responsibility and its use of resources optimally to serve the customers with better quality would promote the higher of its reputation in the eyes of customers and other stakeholders. This would, in turns, lead the bank to easily enhance its ability to win the competition [38]. A good reputation perceived by the customers lead them to become more loyal to the banks, increases the bank’s competitive advantage [39], and their performance [21, 22].

Based on the above discussion, this study proposes the following research model for estimation.

Thus, referring to Fig. 1, this study would test the following hypotheses:

Competence, innovation, and reputation influence competitive advantage of the rural banks in Indonesia.

Competence, innovation, and reputation influence performance of the rural banks in Indonesia.

Competitive advantage mediates the effects of competence, innovation, and reputation on the performance of the rural banks in Indonesia.

Fig. 1

The proposed research model.

3 Research method

In the era of new financial technology, there has been a new challenge for micro-financial institutions to attract more customers due to fierce competition within the industry in Indonesia. Facing the well-established large-scale banking institutions, strategic actions need to be taken by the small-scale financial institutions such as the rural banks if they want to win the competition or at least to survive. Considering this crucial issue, thus this study intends to probe the following questions: (i) what are the determinants of the small-scale banks’ success to have a higher level of competitive advantage and a consequently higher level of performance? (ii) do core competency, innovation, and reputation matter for the improvement of small-scale banks’ competitiveness and performance? (iii) if yes, how do they affect the banks’ competitiveness and performance? and (iv) does competitive advantage mediate the effect of competence, innovation, and reputation on the performance of the small-scale banks?

Based on the above research questions, thus this study intends to empirically explore and analyze the importance of core competence, innovation, and reputation in influencing competitive advantage and performance of the rural banks in Indonesia. It also attempts to empirically investigate and analyze the mediating effect of competitive advantage on the relationships between core competence, innovation, and reputation on the performance of the rural banks in Indonesia.

3.1 Population and sample

The population of this study is all 875 employees at entire 16 BPRs across 7 cities/districts (i.e., 203 employees at 3 BPRs located in Banda Aceh city, 260 employees at 4 BPRs located in Aceh Besar district, 87 employees at 1 BPRs located in Pidie district, 105 employees at 2 BPRs located in Lhokseumawe city, 65 employees at 3 BPRs located in Aceh Jeumpa district, 95 employees at 2 BPRs located in Langsa city, and 60 employees at 1 BPRs located in Aceh Tengah district) in the province of Aceh, Indonesia. Of the population, 628 of them are employees at the 14 private-owned BPRs, 167 are employees at the 1 local government-owned BPRs, and the rest 80 are employees at the 1 co-operative-based BPRs. Using the Slovin formula at the 5% precision level, the sample size of the study is 350 employees at all BPRs across 7 cities/districts in the province of Aceh, Indonesia and they are selected based on the proportionate stratified sampling technique. The details of the population and sample of the study are presented in Table 1.

Table 1
Population and sample of the study

District/City BPR and Employee Population –Number of BPRs and Employees Total Population Sample –Number of BPRs and Employees Total Sample

PBPR GBPR CBPR PBPR GBPR CBPR

Banda Aceh BPR 3 0 0 3 3 0 0 3

Employee 88 115 0 203 35 46 0 81

Aceh Besar BPR 2 1 1 4 2 1 1 4

Employee 128 52 80 260 51 21 32 104

Pidie BPR 1 0 0 1 1 0 0 1

Employee 87 0 0 87 35 0 0 35

Lhokseumawe BPR 2 0 0 2 2 0 0 2

Employee 105 0 0 105 42 0 0 42

Aceh Jeumpa BPR 3 0 0 3 3 0 0 3

Employee 65 0 0 65 26 0 0 26

Langsa BPR 2 0 0 2 2 0 0 2

Employee 95 0 0 95 38 0 0 38

Aceh Tengah BPR 1 0 0 1 1 0 0 1

Employee 60 0 0 60 24 0 0 24

Total BPR 14 1 1 16 14 1 1 16

Employee 628 167 80 875 251 67 32 350

District/City	BPR and Employee	Population –Number of BPRs and Employees	Total Population	Sample –Number of BPRs and Employees	Total Sample
Banda Aceh	BPR	3	0	0	3	3	0	0	3
	Employee	88	115	0	203	35	46	0	81
Aceh Besar	BPR	2	1	1	4	2	1	1	4
	Employee	128	52	80	260	51	21	32	104
Pidie	BPR	1	0	0	1	1	0	0	1
	Employee	87	0	0	87	35	0	0	35
Lhokseumawe	BPR	2	0	0	2	2	0	0	2
	Employee	105	0	0	105	42	0	0	42
Aceh Jeumpa	BPR	3	0	0	3	3	0	0	3
	Employee	65	0	0	65	26	0	0	26
Langsa	BPR	2	0	0	2	2	0	0	2
	Employee	95	0	0	95	38	0	0	38
Aceh Tengah	BPR	1	0	0	1	1	0	0	1
	Employee	60	0	0	60	24	0	0	24
Total	BPR	14	1	1	16	14	1	1	16
	Employee	628	167	80	875	251	67	32	350

Note: PBPR is the private-owned BPRs; GBPR is the local government-owned BPR; and CBPR is the co-operative-owned BPRs.

Table 1 illustrates that the employees of the BPRs that are selected as the sample of the study based on the proportionate stratified sampling technique according to their locations and types of the BPRs comprise 81 employees at the 3 private-owned BPRs in Banda Aceh city; 51 employees at the 2 private-owned BPRs, 21 employees at the 1 local government-owned BPR, and 32 employees at the 1 co-operative-owned BPR in Aceh Besar district; 35 employees at the 1 private-owned BPR in Pidie district; 42 employees at the 2 private-owned BPR in Lhokseumawe city; 26 employees at the 1 private-owned BPR in Aceh Jeumpa district; 38 employees at the 2 private-owned BPR in Langsa district; and 25 employees at the 1 private-owned BPR in Aceh Tengah district. In totality, 350 employees (i.e., 251 employees at the 14 private-owned BPRs, 67 employees at the 1 local government-owned BPR, and 32 employees at the 1 co-operative-owned BPR) across 7 cities/districts are selected as the respondents of the study. The number of sampling selected in the study was representative enough and fulfill the minimum sample size for the SEM analysis. Hair et al. (2012) argued that to produce robust findings, the minimum sample size should be five times the number of indicators of the variables [40]. Since 28 items are used to measure 5-variable in this study, thus the minimum sample needed is 140 respondents. Thus, 350 BPRs’ employees in managerial level from lower to top manager that were selected in this study are large enough to represent the entire sample and it could certainly provide the robust estimated findings.

3.2 Operationalized variables

To ensure a high level of validity, all item measurements of variables are adapted from the previous study with some minor modifications made to fit the context of the study. To measure the performance of BPRs (endogenous variable), 4 indicators, comprising perspectives of customer, business and internal process, growth and learning process, and finance are used. To measure the competitive advantage (mediating variable), 3 indicators are used (i.e., differentiated product advantage; cost advantage; and market segmented advantage). Meanwhile, to measure the bank reputation (exogenous variable), 4 indicators are used (i.e., social activity; management; collaboration/networking; and fast/quick services). To measure the innovation (exogenous variable), 3-indicators are used (i.e., skill; ability; and motivation), and finally to measure competency (exogenous variable), 3-indicators of market, integrity, and function are used.

3.3 Data analysis technique

To empirically explore and analyze the direct effects of core competence, innovation, and reputation in influencing competitive advantage and performance and the mediating effect of competitive advantage on the relationships between core competence, innovation, and reputation on the performance of the rural banks in Indonesia, the multivariate technique of structural equation modeling (SEM) technique is adopted in this study and analyzed using the Analysis of Moment Structures (AMOS) program version 22.0. The SEM is a statistical technique to analyze indicator variables, latent variables, and measurement errors [41], and relationships among variables. The SEM multivariate technique combines aspect for factors analysis and multiple regression that allows the tests of dependency relationships between measured variables and latent constructs simultaneously [40].

To provide the answer for the research objectives, the following SEM equations are estimated: $CADV = γ_{11} COMP + γ_{12} INOV + γ_{13} REP + ɛ_{1}$ (1) $PERF = γ_{21} COMP + γ_{22} INOV + γ_{23} REP + ɛ_{2}$ (2) $PERF = γ_{31} COMP + γ_{32} INOV + γ_{33} REP + γ_{34} CADV + ɛ_{3}$ (3) where CADV is the competitive advantage; COMP is the competency; INOV is the innovation; REP is the reputation; PERF is the performance of the BPRs; γ_ii are the estimated standardized loading factor of variables; ɛ_i is the structural error term.

Before estimating the Equations (1)–(3), the instrument tests of validity and reliability were conducted to discover the most powerful and the weakest indicators measuring the latent variables as indicated by the standardized loading factor and to ensure the consistency of indicators. The test of validity for overall suitability models is based on the product-moment of the Pearson correlation and the goodness of fit indices. The best suitability level is categorized as a good fit; the moderate level is categorized as marginal fit; and the weakest level is categorized as a poor fit. In this case, the validity test was conducted for 17 indicators, comprising 4-item measuring the performance of BPRs, 3-item measuring the competitive advantage of BPRs, 4-item measuring reputation of BPRs, 3-indicator measuring innovation; and 3-item measuring competency. Meanwhile, the reliability test is conducted by identifying the correlating scores of each item in the form of statements with their scores. The correlation between items’ scores and the total scores should be significant and its value to be greater than 0.70 [40] for the item to be categorized as reliable.

In short, in the data analysis, prior to the instrument tests and estimation of the SEM equations, the study provides first the descriptive statistics of the respondents and their perceptions on the variables using the statistical software of the SPSS version 22.0. As suggested by [42], this study assessed the properties of measurement scales for convergent validity and discriminant validity, and constructed composite reliability by the confirmatory factor analysis (CFA), followed by estimating the SEM equation to verify the direct and indirect path relationships between the investigated variables using the statistical software of AMOS version 22.0.

4 Findings and discussions

4.1 Descriptive statistics of the respondents

Of 875 employees at the BPRs in the province of Aceh, Indonesia, 350 of them were selected as the respondents of the study. All questionnaires distributed to the respondents were returned and completely filled up. Of 350 respondents, the majority of them were men (61.71%) and the rest 38.29% was female. In term of year of services, majority of them have served the BPRs between 5 – 10 years (36.57%), followed by years of services between 3 – 5 years (33.14%), less than 3-year of services (22.86%), and more than 10-year of services (7.43%). In the view of the educational level, the majority of staff were with a bachelor degree (61.71%), followed by a diploma degree (37.14), and master degree (1.14%). This indicated that the majority staff at the BPRs in Aceh, Indonesia having sufficient education level. In the view of number of dependents, the staff were dominated by those who have 2 – 3 number of dependents (56.86%), followed by 1 number of dependent (30.29%), 4 – 5 number of dependents (12.29%), and more than 5 number of dependents (0.57%). Finally, in term of the monthly income, 44% of them earned a monthly income of more than IDR3 million, 40% earned monthly income between IDR2 – 3 million, 13.43% earned monthly income between IDR1 – 2 million, and the rest 2.57% earned a monthly income of less than IDR1 million.

4.2 Respondents’ perception

In this section, the perception of the respondents on the investigated variables is reported. The BPRs’ employees perceived that core competency, innovation, reputation, competitive advantage, and BPRs’ performance were in a good category, indicated by a mean value of each variable of greater than 3.40 and it was statistical significance at the 1% level. Specifically, the competency showed the highest mean value of 4.279, followed by innovation (4.259), BPRs’ performance (4.247), competitive advantage (4.239), and reputation (4.152). The BPRs’ reputation was perceived as the lowest mean value compared to the other variables. This indicated that the BPRs’ reputation is perceived to be lower when it is compared to their commercial banking image in the country.

4.3 Model measurement

To ensure the accuracy and consistency of the indicators in measuring the investigated variables, the study tested the validity and reliability of the indicators. As estimated in the measurement model illustrated in Fig. 2, all 17 indicators for measuring 5 investigated variables were found to be valid and reliable, as indicated by the 5% level of significance of each standardized loading factors of greater than 0.50. This showed that all indicators could be used to measure the variables for further analysis.

Fig. 2

The estimated measurement model.

Subsequently, to ascertain the appropriateness of the estimated SEM, the study performed the goodness of fit test. The findings of the goodness of fit indices (GFI) are reported in Table 2.

Table 2

Findings of the goodness of fit indices (GFI)

No.	GFI	Cut off values	Finding	Remarks
1.	X²/df	<2	1.157	Good fit
2.	RMSEA	<0.08	0.028	Good fit
3.	SRMR	<0.05	0.033	Good fit
4.	AGFI	>0.90	0.910	Good fit
5.	GFI	>0.90	0.938	Good fit
6.	TLI	>0.95	0.983	Good fit
7.	NFI	>0.90	0.910	Good fit
8.	RFI	>0.90	0.886	Marginal fit
9.	IFI	>0.90	0.987	Good fit
10.	CFI	>0.90	0.987	Good fit

As observed from Table 2, the study found that, out of 10 goodness of fit indices tested, only one index was found to be marginal fit, while the rest 9 indices were found to be a good fit. The Relative Fit Index (RFI) was only the index that is found to be marginal fit where its value was below the cut-off values (RFI = 0.886 < 0.90). Meanwhile, the estimated goodness of fit indices of X²/df (Chi-Square/degree of freedom), the Root Mean Square Error of Approximation (RMSEA), and the Standardized Root Mean Square Residual (SRMR) were found to be below their cut-off values (i.e., X²/df=1.157 < 2.00; RMSEA = 0.028 < 0.08; and SRMR = 0.033 < 0.05). Besides, the study also documented that the values of other goodness fit indices, comprising of the Augmented Goodness of Fit (AGFI), the Goodness of Fit (GFI), the Tucker-Lewis Index (TLI), the Normed Fit Index (NFI), the Incremental Fit Index (IFI), and the Comparative Fit Index (CFI) were all above their cut-off values of > 0.90.

Overall, the SEM equations estimated were found to be the good fit model. It is hard to find all the goodness of fit indices meet all the goodness of estimated SEM, particularly as the size of the study sample is large [43], as the case of our study.

4.4 Direct effects of competency, innovation, and reputation on competitive advantage and BPRs’ performance

Figure 3 illustrated the findings of the SEM estimates. The figures showed the interrelationships among the variables both directly and indirectly. The figure illustrated the direct effects of core competency (COMP), innovation (INOV), and reputation (REP) on the competitive advantage (CADV) and performance (PERF) and the mediated effect of the competitive advantage (CADV) on the influences of the core competency (COMP), innovation (INOV), and reputation (REP) on the performance of the BPRs in the province of Aceh, Indonesia.

Fig. 3

The estimated SEM.

To easily identify the size of the direct effects of and their significances, the findings from Fig. 3 are summarized in Table 3. Specifically, the table reported the main findings of direct effects of core competency (COMP), innovation (INOV), and reputation (REP) on the competitive advantage (CADV) and performance (PERF) of the BPRs in the province of Aceh, Indonesia.

Table 3

Direct effects of competency, innovation, and reputation on competitive advantage and BPRs’ performance

Interactions among variables			Estimated coefficient	Critical value	P-value
CADV	< —	COMP	0.342^***	3.039	0.000
CADV	< —	INOV	0.313^***	3.038	0.000
CADV	< —	REP	0.320^***	3.672	0.000
PERF	< —	COMP	0.492^***	6.201	0.000
PERF	< —	INOV	0.244^***	4.032	0.000
PERF	< —	REP	– 0.033	– 0.078	0.937
PERF	< —	CADV	0.231^***	7.266	0.000

Note: ^*** indicates significance at the 1% level.

As observed from Table 3, all variables of core competency, innovation, reputation were found to have a positive significant effect on the competitive advantage of the BPRs at the 1% level, respectively. The estimated value of 0.342 indicated that an increase by 1 unit in the level of core competency has contributed to an increase in the level of competitive advantage by 0.342 units in the Likert scale. The higher level of the core competency of the BPRs, indicated by a better quality of employees, product diversification, and their environmental oriented operations have caused a higher level of BPRs’ competitive advantages. Having these competencies, the BPRs have been able to provide their customized products and services according to the needs of customers with the lowest cost.

Our finding of a significant effect of core competency on the competitive advantage of the BPRs in the province of Aceh, Indonesia is similar to the finding of the study by [44]. The core competencies are the main driver and the crown of the BPRs’ competitive advantage. Relying on the strength of their competencies, the BPRs can easily identify and enhance their competitive advantage and consequently guide the BPRs’ strategic direction for future business [32]. Therefore, the BPRs’ core competency played an important role in strategic management to make the best use of their resources and enhance competitive advantage [20].

Table 3 also showed that innovation positively and significantly affected the competitive advantage of the BPRs in the province of Aceh, Indonesia. An estimated value of 0.313 implied that an increase in the level of innovation by 1 unit has caused an increase in the level of competitive advantage by 0.313 units in the Likert scale. Innovations in their process, products, services, operations, and the innovative ways of the BPRs in responding to customer’s complaints have resulted in an enhancement of the competitive advantage of the BPRs. This finding supported the findings of an earlier study by [45] who documented a significant positive effect of innovation on the competitive advantage of the food manufacturing SMEs in Malaysia [45]. The ability of BPRs to adapt themselves to a dynamic environment with new thinking and new ideas has enabled the BPRs to offer innovative products that provide higher satisfaction to their customer [34]. As one of important sources of the BPRs’ competitive advantages to respond the changes in business environment [35], innovation has been part of the BPRs’ culture that positioned themselves at the forefront of micro-financing institutions in the province of Aceh, Indonesia, which was able responding to an ever-changing market dynamics [25]. The ability of the BPRs to innovate themselves has made them to easily win the competition arises from the emergence of competing products [36].

As illustrated in Table 3, the study documented that the BPRs’ reputation has a significant effect on their competitive advantage. An estimated value of 0.320 implied that an increase in the level of reputation by 1 unit has caused an increase in the level of competitive advantage by 0.320 units in the Likert scale. The smaller size of interest-free financing provided by the BPRs as compared to other well-established commercial banks, such as the largest micro-credit in Indonesia, Bank Rakyat Indonesia (BRI) has caused the reputation of the BPRs relatively higher in the eyes of the customers. Consequently, this leads to the significant effect of reputation on the competitive advantage of the BPRs in the province of Aceh, Indonesia. Additionally, the ability of the BPRs to improve the skills of their employees, actively participate in many social activities and foster business partners have caused the BPRs’ reputation to increase and subsequently affected their competitive advantages.

The significant effect of reputation on enhancing the competitive advantage of the BPRs in the province of Aceh, Indonesia is in harmony with the finding by [49] who documented the significant influence of corporate image on the competitive advantage of 205 Iranian manufacturing and consumer product firms. A small scale of interest-free financing provided by the newly established BPRs in the province of Aceh, Indonesia as compared to other well-established large scales of conventional banking institutions nationwide is believed to be the main contribution for the significant effect of the BPRs’ reputation on their competitive advantage level. The reputation of the BPRs as the interest-free micro-financing institutions in the dominant Muslim populous province of Aceh, Indonesia, the BPRs involvements in many social activities, and the ability of the BPRs in enlarging business partners have made the BPRs’ reputation higher as compared to their commercial banking counterparts. Of 34 provinces in Indonesia, the status of Aceh as the only province that has been granted to implement the Islamic law since last decade has caused the BPRs to easily attract more customers by providing shariah-compliant products and services. All these phenomena have increased the reputation of the BPRs and consequently had enhanced their competitive advantages [39].

Furthermore, except for the reputation, all other variables of the core competency, innovation, and competitive advantage have positive significant effects on the BPRs’ performance at the 1% level. A better level of core competency related to the quality of employees and product diversification, a higher level of innovation in process, products and services, and higher competitive advantage of the BPRs in responding the market dynamics have contributed to the enhancement of their performances. The BPRs has been able to increase their revenues and turnovers, supported by the implementation of the cost-cutting measures.

In term of the magnitude effect, the competitive advantage is found to be the most dominant factor in affecting the BPRs’ performance. Specifically, an increase in a 1 unit of competitive advantage, reputation, innovation, and core competency has contributed to an increase in the level of the BPRs’ performance by 0.429, 0.244, and 0.231 units in the Likert scale, respectively. This further indicated the important role of competitive advantage in promoting the performance of the micro-financing institution in the province.

The significant effects of all these variables on the BPRs’ performance are supported by many previous studies. For example, [46] and [20] found a positive influence of core competence on the business performance; [25 , 47] documented a positive significant effect of innovation on business performance; and [4] found a significant positive effect of competitive advantage on business performance.

Unlike the core competency, innovation, and competitive advantage, the study found the insignificant effect of the BPRs’ reputation on their performance. The lower level of quality services of the BPRs when it is compared to the micro-financing services provided by the well-established conventional commercial banks, such as the largest micro-credit in Indonesia, Bank Rakyat Indonesia (BRI) has caused the reputation of the BPRs relatively lower in the eyes of the customers. Consequently, this leads to the insignificant effect of reputation on the performance of the BPRs in the province of Aceh, Indonesia, although the BPRs have been able to improve the skills of their employees, actively participate in many social activities, and foster business partners.

The insignificant effect of reputation on enhancing the performance of the BPRs in the province of Aceh, Indonesia is contradicted to the findings by [21, 48] who found a positive influence of corporate image on the performance of 205 Iranian manufacturing and consumer product firms. A small scale and newly established BPRs in the province of Aceh, Indonesia as compared to other well-established large scale banking institutions nationwide is believed to be the main contribution for the insignificant effect of the BPRs’ reputation on their performances. A relatively smaller of the BPRs’ networks and business partners as compared to their commercial banking counterparts perceived by the customers has led difficulty to the BPRs to enhance their performance [39].

Our findings on the direct effects of core competency, reputation, and innovation on the BPRs’ competitive advantage and the direct effects of core competency, innovation, and competitive advantage on the BPRs’ performance indicated the importance of business manager to focus more on enhancing core competency for a higher level of the BPRs’ competitive advantage. The manager should also prioritize the enhancement of the BPRs’ competitive advantage as this variable was found to be the most dominant factor in improving the business performance of the BPRs. More diversified products and services of the BPRs should be more prioritized for environmentally friendly activities that meet the need of customers and delivered with the lowest cost possible. The BPRs should further enhance their efficient level through the innovation in their process, products, services, and operations.

4.5 Mediating effects of competitive advantage on the relationships between competency, innovation, and reputation on the BPRs’ performance

Table 4 summarized the findings from Fig. 3 to show the mediating effect of competitive advantage on the relationships between core competency, innovation, and reputation on the performance of the BPRs in Aceh province, Indonesia. As illustrated in Table 4, the study documented strong evidence that the competitive advantage mediated significantly the effects of core competency, reputation, and innovation on the BPRs’ performance, as indicated by the Sobel-test’s p-value of less than 1%. This indicates a pivotal role of the competitive advantage in promoting the BPRs’ performance through the enhancement of core competency, reputation, and innovation in their operations, product, and services. These findings are supported by our earlier finding on the insignificant direct effect of reputation on the BPRs’ performance.

Table 4
Indirect Effects of competency, innovation, and reputation on BPRs’ performance through competitive advantage

Indirect effect Estimated coefficient Sobel t-value P-value

PERF< — CADV< — COMP 0.079^* 2.806 0.005

(0.342 x 0.231)

PERF< — CADV< — INOV 0.056^* 3.293 0.000

(0.313 x 0.231)

PERF< — CADV< — REP 0.072^*** 6.086 0.000

(0.320 x 0.231)

Indirect effect	Estimated coefficient	Sobel t-value	P-value
PERF< — CADV< — COMP	0.079^***	2.806	0.005
	(0.342 x 0.231)
PERF< — CADV< — INOV	0.056^***	3.293	0.000
	(0.313 x 0.231)
PERF< — CADV< — REP	0.072^***	6.086	0.000
	(0.320 x 0.231)

Note: ^*** indicates significance at the 1% level.

The significant mediating effect of competitive advantage on the relationships between the competitive advantage and innovation on the BPRs’ performance showed that the competitive advantage functioned as the partially mediated variable since both direct effect of core competency and innovation on the BPRs’ performance and indirect effect of these variables through the competitive advantage on the BPRs’ performance were significant. However, as for the variable of reputation was found to have no direct significance relationship with the BPRs’ performance, but its effect was only found indirectly through the enhancement of the BPR’s competitive advantage, thus, the competitive advantage is found to act as the full mediator. These findings further confirmed the importance of enhancing competitive advantage for achieving higher performance.

Overall, our findings implied that to promote the performance of the BPRs, the focus should be given on improving the competitive advantage of the BPRs. Any efforts to enhance the BPRs’ competitive advantage such as provide a more diversified innovative and high quality of product and services with the lowest cost possible would finally increase the performance of the BPRs in the province of Aceh, Indonesia. These findings support the empirical evidence of earlier studies such as [4 , 47].

In addition, our finding on the significant indirect effect further confirmed our earlier finding from the direct effect of an exogenous variable on endogenous variable where the variable of core competency was found to be the crucial determinant in enhancing competitive advantage and performance of the BPRs. This further indicates the pivotal role of human resources with higher skills to promote the BPRs’ competitive advantage and their performances. The BPRs should be able to enhance and combine various business skills and integrate them into the BPRs’ business strategy following technological advancement. The BPRs should enhance their potential access to a broad range of markets through online and make it difficult for their competitors to imitate [30]. The improvement of core competency would contribute towards the competitive advantage of the BPRs and finally their performances.

Our findings on the direct effects of core competency, innovation, and reputation on the BPRs’ competitive advantage and the direct effects of all these variables on the BPRs’ performance indicated the importance of business manager to focus more on enhancing core competency for a higher level of the BPRs’ competitive advantage. The manager should also prioritize the enhancement of the BPRs’ competitive advantage as this variable was found to be the most dominant factor in improving the business performance of the BPRs. More diversified products and services of the BPRs should be more prioritized for environmentally friendly activities that meet the need of customers and delivered with the lowest cost possible. These strategies could help the BPRs to increase their reputation, as documented in the earlier studies by [39, 49]. Finally, the BPRs should further enhance their efficient level through the innovation in their process, products, services, and operations.

5 Conclusion

This study empirically explored the direct effect of core competency, innovation, and reputation on the competitive advantage and performance of the rural banks (Bank Perkreditan Rakyat – BPRs) in the province of Aceh, Indonesia. It also attempted to investigate the indirect effect of the competitive advantage on the relationship between core competency, innovation, and reputation on the BPRs’ performance. 350 employees at the 16 BPRs across 7 cities/districts in the province of Aceh, Indonesia were selected as the respondents of the study on the basis of proportionate stratified random sampling technique.

Using the structural equation modeling (SEM) analysis, the study found that core competency, innovation, and reputation have significant positive direct effects on the BPRs’ competitive advantage. Except for reputation, core competency, innovation, and competitive advantage were all documented to positively and indirectly affect the BPRs’ performance. The study found a partial significant mediated effect of competitive advantage on the relationship between core competency and innovation to the BPRs’ performance and a full significant mediated effect of competitive advantage on the relationship between reputation and the BPRs’ performance.

The significant direct effects of core competency, reputation, and innovation on the BPRs’ competitive advantage; the significant direct effects of core competency and innovation on the BPRs’ performance; insignificant effect of reputation on the BPRs’ performance; and the indirect effects of core competency, innovation, and reputation on the BPRs’ performance through the competitive advantage documented in our study indicated that all efforts to enhance the BPRs’ performance should be focused on the improvement of competitive advantage on the basis of core competency, innovation, and reputation. A more diversified innovative and high quality of products and services with the lowest cost possible that meet the need of the customers are among the prioritized strategic program of the BPRs to be implemented for the sake of improving the BPRs’ competitive advantages and consequently their performances.

To further provide more comprehensive and robust empirical findings of the mediated effect of competitive advantage on the influences of core competency, innovation, and reputation on the performance of micro-financing institutions in Indonesia, future studies on this issue are suggested to cover more rural banks across the provinces nationwide. Exploring comparatively between the performances of Islamic and conventional rural banks would also provide a further contribution towards the enhancement of banking performance through sharing ideas and experiences in improving core competency, innovation, and reputation between those rural banking entities.

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