Advertisement

Economic Change and Restructuring

, Volume 51, Issue 1, pp 69–95 | Cite as

Banking efficiency and its determinants in selected frontier african markets

  • Roland Banya
  • Nicholas BiekpeEmail author
Article

Abstract

The degree of banking efficiency is of key importance as this has significant implication on the stability of financial systems and ultimately impacts on an economy. In this paper, we extend the existing literature by measuring the degree of bank efficiency in ten frontier African countries. We also attempt to analyse the determinants of banking efficiency in the sample countries. We employ a bank-level panel data set over the period 2008–2012 to measure banking efficiency in a two-stage procedure. In the first stage, we use the Data Envelopment Analysis technique to estimate technical, pure technical and scale bank efficiency. In the second stage, we use Simar and Wilson (J Econom 136:31–64, 2007) truncated bootstrapping approach to analyse the determinants of banking efficiency. The results of our analysis show that, to a greater extent, banks in the countries studied have efficient banking sectors. The results of truncated regression indicate that bank size is negatively related to banking sector efficiency while the degree of risk is positively related bank efficiency. Overall, the present study provides empirical information that may be used to guide future financial reform policies in the Frontier African countries.

Keywords

Bank Efficiency determinants DEA Bootstrap 

JEL Classification

C14 D21 G21 N27 

References

  1. Abdul Majid MZ, Sufian F (2007) Market structure and competition in emerging market: evidence from malaysian islamic banking industry, MPRA Paper No. 12126. University Library of Munich, MunichGoogle Scholar
  2. Aigner D, Lovell CAK, Schmidt P (1977) Formulation and estimation of stochastic frontier production function models. J Econom 6:21–37CrossRefGoogle Scholar
  3. Aikaeli J (2008) Commercial bank efficiency in Tanzania. A paper presented at a CSAE conference on economic development in Africa, held at St. Catherine’s College, Oxford, 16th–18thGoogle Scholar
  4. Alhassan AL (2015) Income diversification and bank efficiency in an emerging market. Manag Finance 41(12):1318–1335Google Scholar
  5. Alhassan AL, Tetteh ML, Brobbey FO (2016) Market power, efficiency and bank profitability: evidence from Ghana. Econ Change Restruct 49:71–93CrossRefGoogle Scholar
  6. Aly HY, Grabowski R, Pasurka C, Rangan N (1990) Technical, scale and allocative efficiencies in US banking” an empirical investigation. Rev Econ Stat 72:211–218CrossRefGoogle Scholar
  7. Andersen TB, Tarp F (2003) Financial liberalization, financial development and economic growth in LDCs. J Int Dev 15(2):189–209CrossRefGoogle Scholar
  8. Banker RD, Natarajan R (2008) Evaluating contextual variables affecting productivity using data envelopment analysis. Oper Res 56:48–58CrossRefGoogle Scholar
  9. Bauer PW, Berger AN, Ferrier GD, Humphrey DB (1998) Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods. J Econ Business 50(2):85–114CrossRefGoogle Scholar
  10. Beccalli E, Casu B, Girardone C (2006) Efficiency and stock performance in european banking. J Bus Finance Acc 33(1–2):245–262CrossRefGoogle Scholar
  11. Berger AN, DeYoung R (1997) Problem loans and cost efficiency in commercial banks. J Bank Finance 21(6):849–870CrossRefGoogle Scholar
  12. Berger AN, Humphrey DB (1997) Efficiency of financial institutions: international survey and directions for future research. Eur J Oper Res 98:175–212. doi: 10.1016/S0377-2217(96)00342-6 CrossRefGoogle Scholar
  13. Berger AN, Mester LJ (1997) Inside the black box: what explains differences in the efficiencies of financial institutions? The working paper series, Wharton School Centre for Financial Institutions, University of PennsylvaniaGoogle Scholar
  14. Berger AN, Hunter WC, Timme SG (1993) Efficiency of financial institutions: a review and preview of research, past present, and the future. J Bank Finance 21:895–947. doi: 10.1016/S0378-4266(97)00010-1 CrossRefGoogle Scholar
  15. Berger AN, Demsetz RS, Strahan PE (1999) The consolidation of the financial services industry: causes, consequences, and implications for the future. J Bank Finance 23(2–4):135–194CrossRefGoogle Scholar
  16. Bougnol ML, Dulá JH, Estellita Lins MP, Moreira da Silva AC (2010) Enhancing standard performance practices with DEA. Omega 38(1–2):33–45CrossRefGoogle Scholar
  17. Brownbridge M, Gockel AF (1996) The impact of financial sector policies on banking in Ghana: IDS working paper, No. 38, Institute of Development Studies, Sussex UniversityGoogle Scholar
  18. Casu B, Girardone C (2006) Bank competition, concentration and efficiency in the single European market. Manch Sch 74:441–468CrossRefGoogle Scholar
  19. Chan S-G, Karim MZA (2010) Bank efficiency and macro-economic factors: the case of developing countries. Global Econ Rev 39(3):269–289CrossRefGoogle Scholar
  20. Charnes A, Cooper WW, Rhodes E (1978) Measuring efficiency of decision making. Manage Sci 27:668–697CrossRefGoogle Scholar
  21. Chen C (2009) Bank efficiency in sub-saharan african middle-income countries, IMF working paper, WP/09/14Google Scholar
  22. Chen Y, Lin C (2007) Empirical study on the efficiency analysis of Australian banks. Banks Bank Syst 2:38–49Google Scholar
  23. Chinaemerem OC, Anthony O (2012) Impact of capital structure on the financial performance of Nigerian firms. Arab J Bus Manag Rev 1(12):43–61Google Scholar
  24. Cooper M, Jackson W, Patterson G (2003) Evidence of predictability in the cross-section of bank stock returns. J Bank Finance 27:817–850CrossRefGoogle Scholar
  25. Daraio C, Simar L (2005) Introducing environmental variables in nonparametric frontier models: a probabilistic approach. J Prod Anal 24(1):93–121CrossRefGoogle Scholar
  26. Daraio C, Simar L (2007) Conditional nonparametric Frontier models for convex and non-convex technologies: a unifying approach. J Prod Anal 28:13–32CrossRefGoogle Scholar
  27. Delis MD, Papanikolaou NI (2009) Determinants of bank efficiency: evidence from a semi-parametric methodology. Manag Finance 35(3):260–275Google Scholar
  28. Dell’Atti S, Pacelli V, Mazzarelli G (2015) The efficiency of the European banking groups and its determinants. Manag Finance 41(7):734–751Google Scholar
  29. Deprins D, Simar L, Tulkens H (1984) Measuring labor-efficiency in post offices. In: Marchand M, Pestieau P, Tulkens H (eds) The performance of public enterprises: concepts and measurements. Elsevier Science Publishing, North-Holland, Amsterdam, pp 243–267Google Scholar
  30. Efron B (1979) Bootstrap methods: another look at the Jack knife. Ann Stat 7:1–26CrossRefGoogle Scholar
  31. Efron B, Tibshirani R (1993) An introduction to the bootstrap. Chapman and Hall, LondonCrossRefGoogle Scholar
  32. Farrell MJ (1957) The measurement of productive efficiency. J R Stat Soc Ser. doi: 10.2307/2343100 Google Scholar
  33. Ferrier G, Lovell CAK (1990) Measuring cost efficiency in banking: econometric and linear programming evidence. J Econom 46:229–245. doi: 10.1016/0304-4076(90)90057-Z CrossRefGoogle Scholar
  34. Frimpong M (2014) Investigating efficiency of ghana banks: a non parametric approach. Amer J Sci Res 7(2010):64–76Google Scholar
  35. Fukuyama H, Weber WL (2009a) Estimating indirect allocative inefficiency and productivity change. J Oper Res Soc 60(11):1594–1608CrossRefGoogle Scholar
  36. Fukuyama H, Weber WL (2009b) A directional slacks-based measure of technical inefficiency. Socio-Econ Plan Sci 43(4):274–287Google Scholar
  37. Fukuyama H, Weber LW (2010) A slacks-based inefficiency measure for a two stage system with bad outputs. Omega 38(5):239–410Google Scholar
  38. Gleason K, Mathur L, Mathur I (2000) The interrelationship between culture, capital structure, and performance: evidence from European retailers. J Bus Res 50(2):185–191CrossRefGoogle Scholar
  39. Gupta OK, Doshit Y, Chinubhai A (2008) Dynamics of productive efficiency of indian banks. Int J Oper Res 5(2):78–90Google Scholar
  40. Gulati R (2008) An examination of technical, pure technical, and scale efficiencies in Indian public sector banks using data envelopment analysis. Eurasian J Bus Econ 1(2):33–69Google Scholar
  41. Gurbuz AO, Yanik S, Ayturk Y (2013) Income diversification and bank performance: evidence from Turkish banking sector. J BRSA Bank Financ Mark 7(1):9–29Google Scholar
  42. Gwahula R (2013) Efficiency of commercial banks in East Africa: a non parametric approach. Int J Bus Manag 8(4):50–64Google Scholar
  43. Holod D, Lewis HF (2011) Resolving the deposit dilemma: a new DEA bank efficiency model. J Banking Finance 35(11):2801–2810CrossRefGoogle Scholar
  44. Humphrey DB (1990) Why do estimates of bank scale economies differ?. Econ Rev Fed Reserve Bank Richmond, September/October, pp 38–50Google Scholar
  45. Ikhide SI (2008) Measuring the operational efficiency of commercial banks in Namibia. South Afr J Econ 76(4):586–595CrossRefGoogle Scholar
  46. Isshaq Z, Bokpin GA (2012) Expansion and efficiency in banking: evidence from Ghana. Manag Decis Econ 33(1):19–28CrossRefGoogle Scholar
  47. Kablan S (2007) Measuring bank efficiency in developing countries: the case of WAEMU (West African Economic Monetary Union), African economic research consortium, May 2007Google Scholar
  48. Kablan S (2010) Banking efficiency and financial development in Sub-Saharan Africa. IMF Working Papers 10(136):1Google Scholar
  49. Kamau AW (2011) Intermediation efficiency and productivity of the banking sector in Kenya. Interdiscip J Res Bus 1(9):12–26Google Scholar
  50. Khan MS, Senhadji AS (2000) Threshold effects in the relationship between inflation and growth. IMF working paperGoogle Scholar
  51. Kirkpatrick C, Murinde V, Tefula M (2008) The measurement and determinants of X-efficiency in commercial banks in Sub-Saharan Africa. Eur J Finance 14(7):625–39CrossRefGoogle Scholar
  52. Kiyota H (2009) Efficiency of commercial banks in Sub Sahara: a comparative analysis Domestic and Foreign bank. Paper presented at the CSAE conference 2009 on Economic Development in AfricaGoogle Scholar
  53. Kongwa LL (2015) Frontier markets, the pre-emerging markets of Africa. Unpublished Master’s thesis, Wits Business SchoolGoogle Scholar
  54. Koopmans TC (1951) Activity analysis of production and allocation. Willey, New YorkGoogle Scholar
  55. Kumar S (2013) Banking reforms and the evolution of cost efficiency in Indian public sector banks. Econ Change Restruct 46:143. doi: 10.1007/s10644-012-9121-8 CrossRefGoogle Scholar
  56. Lang G, Welzel P (1996) Efficiency and technical progress in banking: empirical results for a panel of German Cooperative Banks. J Bank Finance 20:1003–1023CrossRefGoogle Scholar
  57. Levine R (2002) International financial liberalization and economic growth. Rev Int Econ 9:688–702CrossRefGoogle Scholar
  58. Lovell CAK, Walters LC, Wood LL (1994) Stratified models of education production using modified DEA and regression analysis. In: Charnes A, Cooper WW, Lewin AY, Seiford LM (eds) Data envelopment analysis: Theory, methodology, and applications. Kluwer Academic Publishers, BostonGoogle Scholar
  59. Maghyereh AI, Awartani B (2014) The effect of market structure, regulation, and risk on banks efficiency. J Econ Stud 41(3):405–430CrossRefGoogle Scholar
  60. Majumdar S, Chhibber P (1999) Capital structure and performance: evidence from a transition economy on an aspect of corporate governance. Public Choice 98(3/4):287–305CrossRefGoogle Scholar
  61. Maudos J, Pastor JM, Pérez F, Quesada J (2002) Cost and profit efficiency in European banks. J Int Financ Mark Inst Money 12(1):33–58CrossRefGoogle Scholar
  62. Meeusen W, van den Broeck J (1977) Efficiency estimation from Cobb–Douglas production functions with composed error. Int Econ Rev 18:435–444CrossRefGoogle Scholar
  63. Miller S, Noulas A (1996) The technical efficiency of large bank production. J Bank Finance 20(3):495–509CrossRefGoogle Scholar
  64. Motelle S, Biekpe N (2014) Financial intermediation spread and stability of the banking system in the Southern Africa Customs Union. Manag Finance 40(3):276–299Google Scholar
  65. Moyo J, Nandwa B, Council DE, Oduor J, Simpasa A (2014) Financial sector reforms, competition and banking system stability in sub-saharan africa. New perspectivesGoogle Scholar
  66. Mumtaz R, Rauf S, Noreen B (2013) Capital structure and financial performance: evidence from Pakistan (Kse 100 index). J Basic Appl Sci Res 3(4):113–119Google Scholar
  67. Musonda A (2008) An investigation into the determination of cost efficiency in the Zambian Banking system. Paper presented at the 13th annual African Econometrics Society (AES) conference, South AfricaGoogle Scholar
  68. Mwega F (2011) The competitiveness of the financial services in Africa: A case study of Kenya. Afr Dev Rev 23(1):44–59CrossRefGoogle Scholar
  69. Ngalande E (2003) The importance of financial system modernization in Africa. Keynote address at the peer user group conference, BIS Review 27 South AfricaGoogle Scholar
  70. Okeahalam C (2001) Structure and conduct in the commercial banking sector of South Africa. Presented at TIPS 2001 annual forumGoogle Scholar
  71. Okuda H, Hashimoto H and Murakami M (2003) The estimation of Stochastic cost functions of Malaysian commercial banks and its policy implications to bank restructuring. Centre for Economic Institutions, working paper series, no. 2003-2Google Scholar
  72. Randall R (1998) Interest rate spreads in the eastern caribbean. IMF Working Papers 98(59):1Google Scholar
  73. Saka ANA, Aboagye AQQ, Gemegah A (2012) Technical efficiency of the ghanaian banking industry and the effects of the entry of foreign banks. J Afr Business 13(3):232–243CrossRefGoogle Scholar
  74. San TO, Theng YL, Heng BT (2011) A comparison on efficiency of domestic and foreign Banks in Malaysia: A DEA Approach. Business Manag Dyn 1(4):33–49Google Scholar
  75. Schmidt P, Sickles RC (1984) Production frontiers and panel data. J Bus Econ Stat 2(l984):367–374Google Scholar
  76. Segun KRS, Anjugam M (2013) Measuring the efficiency of Sub Saharan Africa’s microfinance institutions and its drivers. Ann Public Cooperative Econ 84(4):399–422CrossRefGoogle Scholar
  77. Sena V (2006) The determinants of firm's performance: can finance constraints improve technical Efficiency?. Eur J Oper Res 172:311–325CrossRefGoogle Scholar
  78. Senbet LW, Otchere I (2006) Financial sector reforms in Africa: perspectives on issues and policies, annual World Bank conference on development economics, St. Petersburg, RussiaGoogle Scholar
  79. Sherman HD, Gold F (1985) Bank branch operating efficiency: Evaluation with data envelopment analysis. J Bank Finance 9:297–315CrossRefGoogle Scholar
  80. Simar L, Wilson PW (2007) Estimation and Inference in two-stage, semi-parametric models of production processes. J Econom 136:31–64CrossRefGoogle Scholar
  81. Sufian F, Habibullah MS (2009) Asian financial crisis and the evolution of Korean banks efficiency: a DEA approach. Global Econ Rev 38(4):335–369CrossRefGoogle Scholar
  82. Sufian F (2008) Determinants of bank efficiency during unstable macroeconomic environment: Empirical: evidence from Malaysia. Res Int Business Finance 23(2009):54–77Google Scholar
  83. Sufian F (2010) Evolution in the efficiency of the Indonesian banking sector: a DEA approach. Int J Appl Manag Sci 2(4):388CrossRefGoogle Scholar
  84. Tone K (2002) A slacks-based measure of super-efficiency in data envelopment analysis. Eur J Oper Res 143:32–41CrossRefGoogle Scholar
  85. World Bank Financial Database (2016) The World Bank. Retrieved from http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Graduate School of BusinessUniversity of Cape TownCape TownSouth Africa

Personalised recommendations