Commercial banks efficiency in Tanzania: A non parametric approach

Abstract

This paper employs Data Envelopment analysis (DEA) to estimate the relative efficiency of selected 20 commercial banks in Tanzania from 2008 to 2011. The findings are categorized based on two groups of commercial banks operating in Tanzania i.e. small and large groups. The selection of these two groups is based on Total asset accumulation, the empirical findings indicates technical efficiency of the selected large banks in Tanzania ranges from 0.54(2008) to 0.79(2011) respectively. There were sharp decline of technical efficiency from 0.79(2008) to 0.54(2009) there after showing increasing trend of technical efficiency to 0.74(2010), generally the results shows that banks are using more resources than what they are producing. In this study this is to say selected large Banks were supposed to use 79 percent to 54 percent of resources available for them to be efficient without compromising the output level under CRS. On another hand small banks were found to be performing worse compared to large banks for example under constant return to scale, the average technical efficiency ranges from 0.70(2008) to 0.65(2011).Similarly the small banks were supposed to use 70% to 65% respectively to produce the current level of output. Under VRS both large and small banks were found to have different efficiency levels, with large banks experiencing more efficiency level compared to small banks, pure technical efficiency declined from 0.91 for large banks  in the year 2008 to 0.83 by the year 2011.In this scenario  large banks were supposed to reduce input resources by 9 percent 2008, 22%2009, 10 percent 2010 and 17 percent 2011 in similar vein  small banks were supposed to reduce input resources by 29 percent (2008), 40 percent 2009, 24 percent (2010) as well as 31 percent 2011while maintaining the present output levels. Therefore inefficiency utilization of input resources could be one of the reasons for inefficiency of commercial banks in Tanzania. Commercial banks operating in the country still have a chance of improvement. It is observed that  through  make use of underutilized resources and reduce operating expenses most commercial banks will remain to be relative efficient in the production frontier.

Key words: Data Envelopment Analysis, Tanzania Commercial banks, Efficiency,