X-efficiency in Tanzanian Commercial Banks: An empirical investigation.

Abstract

This study empirically investigates the X-efficiency of Tanzanian commercial banks for the period of seven years 2005-2007. The X-efficiency is comprised of Technical efficiency and allocative component, there fore x-innefficiency may be due to technical inefficiency and allocative inefficiency. A non parametric method of Data Envelopment Analysis (DEA) is used to arrive to the estimated efficiency scores, followed by Tobit regression to investigate what dertermine x-efficiency of Tanzanian commercial banks.During the period of study, most commercial banks were found to have an overall low efficiency level of 53.2 percent, which is quite lower against world mean. Further analysis reveals the allocative efficiency scores are quite lower than technical efficiency scores, which implies that the X-efficiency of Tanzania commercial banks is more associated with choosing an incorrect input combination rather than inappropriate utilization of inputs. Moreover using Tobit Regression, Bank size, NII (Non Interest Income), non interest expenses as well as capital adequacy were found to have a positive influence on x-efficiency while NPLs were found to have a significant negative relationship.With respect to group categories, similar to previous studies, Large Domestic Banks (LDB) were found to be more efficient than Large Foreign banks (LFB) and Small banks(SB). The study has important implication to managers and regulators since it reveals the main sources of inefficiency.

Key words: Data Envelopment Analysis, X-efficiency, Tobit regression