Productivity Change of Ethiopian Banks: A Malmquist Productivity Index Approach

Abstract

This study evaluates the productivity change of the Ethiopian banking industry. For this purpose secondary data on input variables (interest expense, non-interest expense and deposit) and output variables (interest income, non-interest income and loan) are collected from the audited balance sheets and income statements of the banks under study. A Malmquist productivity index approach is employed to evaluate the productivity change of the Banks. The results of the study confirmed that; Abay bank, Construction and Business Bank and Commercial Bank of Ethiopia exhibited a productivity regress. For Abay Bank productivity regress is due to the technical change component while for Construction and Business bank and Commercial Bank of Ethiopia productivity regress is due to the efficiency change component. Thus, Abay bank should invest more on technological development and innovation while Construction and Business bank and Commercial Bank of Ethiopia should improve their resource use efficiency. The efficiency change component is split into pure technical efficiency component and scale efficiency component and the results revealed that Construction and Business bank and United bank exhibited productivity regress in the pure technical efficiency component while Construction and Business bank, Commercial bank of Ethiopia, Nib international bank and Wegagen bank exhibited productivity regress in the scale efficiency change component. Thus, Construction and Business bank and United bank should improve their managerial capacity and Construction and Business bank, Commercial Bank of Ethiopia, Nib international bank and Wegagen bank should adjust their scale of operation.

Keywords: Productivity Change, Commercial Banks in Ethiopia, Malmquist Productivity Index, Technical Efficiency Change, Technological Change