Measuring the Cost Efficiency of Ethiopian Banks

Abstract

The study has explored the efficiency level of banks using cost models. It has used the Data Envelopment Analysis score to examine the efficiency level of banks under both constant and return of scale. In addition, it has explored the scale efficiency of all the models with a statistical test on the significance of variation among Ethiopian Banks. The study finds that banks efficiency level has witnessed a wide variation across various bank groupings. The study has also finds that the state banks efficiency has been consistently on the efficiency frontier reflecting the high dominance of the banks in the Ethiopian banking system. In addition, the study finds that the small private banks efficiency is growing overtime while the middle size private banks are facing difficult to improve their level of efficiency. The parametric and non-parametric tests also witness that state and private banks possess different management and technology capabilities. This shows that despite the scale advantage the state banks have, the difference in their management and technology capabilities has contributed for better efficiency performances. On the other front, the statistical test on efficiency determinants shows that deposit growth rate, loan size and earning asset growth are positively and significantly related to efficiencies. Nevertheless, branch size and fixed asset growth rate are negatively and insignificantly related to efficiencies. Consistent to such finding, the benchmarking practice suggests that banks holding excessive deposits limiting their intermediation activities are disadvantaged to count on their efficiency performances.

Keywords: Cost, Efficiency, Ethiopian Banks, DEA