A DEA- Based Malmquist Productivity Index approach in assessing performance of commercial banks: Evidence from Tanzania

Abstract

This study intends to measure Productivity change of Tanzanian commercial banks for the period of seven years. In this study the nature of efficiency and productivity change is investigated through the Malmquist Productivity Index (MPI).The Malmquist productivity index has the components which are used in performance measurement; such as changes in technical efficiency, change in technological change, change in pure technical efficiency, change in scale efficiency as well as change in Total factor productivity. Most commercial banks recorded improvement in efficiency change by 67 percent, a technical change improvement by 83 percent, pure technical change improvement by 67 and scale efficiency change by 50 percent.

Generally  the mean efficiency change of LDB is higher compared to the rest of the groups; hence manage to push the frontier of possibility outwards with respect to other groups, followed by small banks with mean efficiency change of 10.3 percent while the LFB recorded efficiency change of 1.8 percent, similarly the mean total factor of productivity of small banks were higher compared with the rest of the groups, by recording productivity improvement of 57.9 percent exceeding LDB  and LFB with 51.4 percent and 54 percent respectively. Generally both groups of commercial banks experienced, technological progress, however the efficiency gains during the period of the study was due to improvement in Technical efficiency rather than scale efficiency. With reference to bank groups, the result implies that small banks have invested in Technological innovation, so as to reduce related costs of production.

Key words: Malmquist productivity index; Technical efficiency; Scale efficiency,