Efficiency in the Ethiopian Banking System: An Application of Data Envelopment Analysis

Abstract

The study is basically intended to conduct assessment on the efficiency level of Ethiopian Banks for the period 2008-2012 using the Data Envelopment Analysis. The result has shown that the industry efficiency level is at modest level but the technical and scale efficiency of Banks is characterized by both inter and intra group variations across different ownership and size. The efficiency of the government banks is the highest and specifically the CBE’s efficiency score persistently is at the frontier. In aggregate basis, banks that were recently emerged in the industry were less efficient than the other groupings, nevertheless, there appear some banks from this group whose efficiency score is as equivalent as the most efficient bank in the industry. The variation among the private banks specifically of the small banks supports the government stance towards following the infant industry protection scheme. The study analyzed the causes of the efficiency variances across various groups and has found out that the variations in efficiency among public and private banks can be explained by public banks favorable support from the government in creating easy market for deposit, loans and forex which has contributed a lot in reducing the cost of fund and boosting both interest and non-interest income. Based on the findings, the study recommends that banks need to work more towards improving their efficiency level so as to ensure equalization of banks towards technical efficiency and increase their competitiveness at international level. This will help in case the government allows foreign banks to operate in the country. In addition, the government should not only protect private banks from external competition but also should support them to enhance their capacity to compete internally by creating a level playing field and enhancing the supervisory capacity in a way to support the technical efficiency of the management.

Keywords: Efficiency Bank Ethiopia