Banks Performance Evaluation in Tanzania: A Non-Parametric Approach

Abstract

This paper endeavours to evaluate the extent of technical, pure technical and scale efficiencies of banking sector in Tanzania using the non-parametric technique of data envelopment analysis. The empirical results show that only 9 of the 25 banks operating in the period from 2011 to 2013 are found to be efficient and thus, define the efficient frontier of Tanzanian banking sector, the TE scores range from 76.4% to 100%, with an average of 94.9% thus, the magnitude of technical inefficiency is to the tune of 5.1%, i.e., inputs could be reduced by 5.1% without sacrificing output if all banks were efficient as 9 benchmark banks identified by DEA and the study notes that managerial inefficiency is the main source of overall technical inefficiency of banking sector in Tanzania. From the analysis of returns-to-scale, it has been noticed that 36% of banks in Tanzania operate in the zone of decreasing returns-to-scale.

Keywords: Technical efficiency: Pure technical efficiency; Scale efficiency; Data envelopment analysis; Super-efficiency; Returns-to-scale