Evaluating the Technical Efficiency of Commercial Banks in Ethiopia: A Data Envelopment Analysis

Abstract

Banking companies in the service sector exhibit the problem of distinct results in terms of efficiency. This problem is a cause of concern for many big organizations in the service sector like banks. In particular, the last decade has observed continuous amendments in regulations; technology and competition in the global financial services industry, and Ethiopian banks are no exception. To measure the stability, sustainability and profitability of the banking system, it is therefore crucial to measure the technical efficiency of the sector. A well-organized banking system will provide an extensive way to increase the economic growth in any country.  Thus, this study evaluated the technical efficiency of commercial banks in Ethiopia using DEA on a data spanning over the period 2011 to 2014 with three input variables (interest expense, operating expenses and deposit) and three output variables (interest income, noninterest income and loans). Accordingly, it was found that under constant returns to scale (CRS), cooperative bank of Oromia (CBO), Berhan international bank (BrIB) and Dashen bank (DB) were the most efficient commercial banks while commercial bank of Ethiopia (CBE), united bank (UB), lion bank (LIB) and Buna international bank  (BuIB) were the least efficient commercial banks. Under the variable returns to scale, BrIB, CBO and nib international bank (NIB) were found to be more efficient banks while CBE, UB and BuIB were the least efficient banks. Considering the scale efficiency/inefficiency score; CBO and DB were characterized as the most scale efficient commercial banks while, the rest of commercial banks in Ethiopia under study experienced both pure technical inefficiency and scale inefficiency.

Keywords: Data Envelopment Analysis, Intermediation Approach, Commercial Banks in Ethiopia, Overall Technical Efficiency, Pure Technical Efficiency, Scale Efficiency,