Bank-specific, industry-specific and macroeconomic determinants of bank efficiency in Tanzania: A two stage analysis.

Abstract

The aim of this study is to investigate the effect of bank specific, industry specific and macroeconomic variables of commercial banks' efficiency. Data envelopment analysis is applied to obtain efficiency estimates such as, Technical efficiency (TE), Pure Technical efficiency (PTE) and scale efficiency (SE) for the period of 2005-2008. Afterwards the efficiency estimates were obtained through Tobit regression model. The first stage of our analysis indicates inefficiency estimates are 13%, 9% and 4% for TE, PTE and SE respectively, our efficiency estimates figure indicates the decline of efficiency level during the 2008 study period, the decline in efficiency level may be caused by the international financial crisis which affected some sectors of the economy with no exception of the financial sector. Thereafter showing recovery to reach the score of 97% in 2009, operating under increasing returns to scale. Using Tobit Regression model our findings reveal bank efficiency is influenced by both bank specific, industry specific and macroeconomic factors. More specifically with bank specific factors bank size, profitability measured by NIM, liquidity, as well as capital adequacy were found to be the main factors influencing the bank`s efficiency, while with industry specific characteristic market share and concentration were found to influence significantly bank`s efficiency. Lastly in case of macroeconomic factors only GDP was found to influence the bank`s efficiency. In similar view Non performing loans (NPL), ownership and CPI were found to be insignificant in explaining commercial bank`s efficiency.

Key words: Efficiency, Data Envelopment Analysis, Financial sector.