Drivers of Technical Efficiency of Ethiopian Commercial Banks: DEA Approach & Tobit Model

Abstract

This study was conducted to identify the driving factors of technical efficiency of commercial banks in Ethiopia, initiated following the issuance of different research outputs with varied empirical findings. The study used panel data set of 8 commercial banks with duration in the business of more than 10 years. The technical efficiency scores of the banks were computed with an input oriented Data Envelopment Analysis (DEA) approach. The scores, ranging from 0 to 1, were regressed against the explanatory variables identified, using Tobit Regression Model. The result shows that profitability and management quality have significant positive impact on the efficiency of the banks. It is also revealed that capital adequacy has a negative significant influence. Moreover, the study shows that owner ship of the banks have a significant influence on the efficiency of the banks. State owned banks are found to have better performance efficiency than private owned ones.  Size, liquidity and credit risk of the banks have found to have no significant impact on the efficiency of the commercial banks in Ethiopia.

Keywords: DEA, Efficiency Determinants, Ethiopia, Technical Efficiency, Tobit model