Cost Efficiency and Ownership Structure of Commercial Banks in Ethiopia: An application of non-parametric approach

Abstract

The study was carried out to examine the relationship between cost efficiency and ownership structure of commercial banks in Ethiopia using data envelopment analysis (DEA). Moreover, the study made an attempt to explore the key factors that affect the cost efficiency of the commercial banks using the Tobit model.  In measuring the cost efficiency of the commercial banks the study used the input-oriented BCC model.  The study found that the average cost efficiency of state-owned commercial banks over the period 2000-2009 is 0.69 while that of the private commercial banks is 0.74. The aggregate cost efficiency of Ethiopian commercial banks is found to be 0.73. The Kruskal-Wallis (K-W) non-parametric test indicates that the difference between the cost efficiency of the state-owned and private commercial banks is statistically insignificant. The study found little statistical evidence to conclude that the state-owned commercial banks are less cost efficient than the private commercial banks. Thus, ownership structure has no significance influence on the cost efficiency of commercial banks in Ethiopia. In addition, the study has identified bank size, loan loss reserve to total assets, market share, market concentration, capital adequacy, and return on average assets as the key factors that influence the cost efficiency of the commercial banks.

Key words: DEA, Input -oriented BCC model, cost efficiency, and K-W non-parametric test