Determinants of banks’ cost efficiency: a case study of selected commercial banks, Ethiopia
DOI:
https://doi.org/10.22437/ppd.v8i3.9368Keywords:
Bank, Cost efficiency, Stochastic cost frontierAbstract
This study examines the determinants of cost efficiency commercial banks’ in Ethiopian using balanced panel data with a sample of 13 commercial banks over the period 2010-2017 by paying a translog stochastic cost frontier approach. The identification and selection of inputs and outputs variables was based on the intermediation approach. Accordingly, three input variables (cost of labor, cost of capital, and cost of fund) and two output variables (total loans and other earning assets) are used in the study. Furthermore, five banks specific and one macroeconomic variable are included to examine their effect on cost efficiency. So as to examine the effect of determinant variables which are associated with banks efficiency, a single stage maximum likelihood estimation method is applied to stochastic frontier cost function. The empirical estimations were accomplished by Appling a single stage maximum likelihood function assimilated into Stata software. The estimation is based on conditional mean model concepts. The finding shows that from bank specific factors, return on assets (ROA), and intermediation ratio have positive and significant for intermediation (IR) and insignificant for ROA with cost inefficiency. On the other hand, Bank size (lnTA), Credit risk (CR) and capital adequacy ratio (CAR) have a significant negative coefficient with cost inefficiency. GDP also has negative but insignificant with inefficiency. Therefore, banks are recommended to improve and sustain their efficiency by maintaining available proportion of capital adequacy ratio and attract high value, low interest-bearing demand deposits.
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References
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Anwar, M. (2017). Cost efï¬ciency performance of Indonesian banks over the recovery period: A stochastic frontier analysis. The Social Science Journal, 56(3), 377-389
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Bottasso, A., & Sembenelli, A. (2004), Does Ownership Affect Firms Efficiency: Panel Data Evidence from Italy, Empirical Economics, 29, 769-786.
Charnes, A., Cooper, W., &Rhades, E. (1978). Measuring the Efficiency of Decision-Making Units, European Journal of Operational Research, 2(6), 429-444.
Coelli, T. J., & Rao, D. S. (2005). Total factor productivity growth in agriculture: A Malmquist index analysis of 93 countries, 1980–2000. Agricultural Economics, 32(1), 115–134.
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Eskinder, W. (2013). Ownership Structure and Cost Efficiency of Commercial Banks inEthiopia: A Stochastic Frontier Analysis, Unpublished Paper. Addis AbabaUniversity Economics Department, Addis Ababa, Ethiopia.
Farrell, M.J., (1957). The Measurement of Productive Efficiency. Journal of the Royal Statistical Society. 120(3), 253-289
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Fries, S., &Taci, A. (2005). Cost Efficiency of Banks in Transition: Evidence from 289 Banksin 15 post-communist countries. Journal of Banking & Finance, 29(1), 55-81.
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Omankhanlen, A. E. (2012). The role of banks in capital formation and economic growth: The case of Nigeria. Economy Trans disciplinarily Cognition, 15(1), 103–112.
PardeepKaur & GianKaur (2008). A study of cost efficiency of Indian commercial banks-An impact of mergers. African Journal of Business Management, 7(15), 1238-1249
Rama, K. & Tekeste, K. (2012). Cost Efficiency and Ownership Structure of Commercial Banks in Ethiopia. European Journal of Business and Management, 4(10), 36 - 47
Raphael, G. (2012). Commercial banks efficiency in Tanzania: A non-parametric approach. European Journal of Business and Management, 4(21), 55–67.
Raphael, G. (2013). Efficiency of commercial banks in east Africa: A non-parametric approach. International Journal of Business and Management, 8(4), 50–64.
Řepková, I. (2015). Banking efficiency determinants in the Czech banking sector. Procedia Economics and Finance, 23, 191–196.
Rostislav, S. (2015), Determinants of Bank Efficiency: Evidence from Czech Banking Sector Acta Universities Agriculture EtSilvi culturae Mendelianae Brunensis, 63(3), 1005-1011.
Sanderson, A. & Pierre, R. 2016). Evaluated the cost and revenue efficiency of the Zimbabwean banking sector during the period of 2009- 2014. Economic Research South Africa, ERSA, Working paper 629.)
Scott, S. & Timothy, K. (2006). Management of banking, 6th edition, Thomson Corporation USA.
Seelanatha, S. (2012). Drivers of technical efficiency of Sri Lankan commercial banks. International Journal of Applied Economics, 9(1), 41–58.
Sufian, F.(2008), Determinants of bank efficiency during unstable macroeconomic environment: Empirical: evidence from Malaysia. Research in International Business and Finance, 23(1), 54-77.
Tadele, T. (2016). Determinants of commercial banks efficiency: Evidence from selected Commercial Banks of Ethiopia. International Journal of Scientific and Research Publications, 6(5), 551–556.
Tadesse, Z. (2017), Determinants of bank technical efficiency: Evidence from commercial banks In Ethiopia. Cogent Business & Management, 4(1)
Tecles, T. (2010). Determinants of bank efficiency the case of brazil. Working papers Series brazil n.210 may 2010 p. 1-52).
Tesfay, T. (2016). Determinants of commercial banks efficiency: Evidence from selected commercial banks of Ethiopia. International Journal of Scientific and Research Publications, 6(5), 551–556.
Tochkov, K. and Nenovsky, N, (2011), Efficiency of Commercial Banks in Bulgatia in the Wake of EU Accession. International center for economic research, working paper series, No.21.
Usman, M., Wang, Z., Mahmood, F. & Shahid, H., (2010). Scale Efficiency in Banking Sector of Pakistan,International Journal of Business and Management, 5(4), 104-116.
Wang, H. (2008). Heteroscedasticity and Non-Monotonicity Efficiency Effects of A Stochastic Frontier Model, Journal of Productivity Analysis, 18, 241- 253
Anwar, M. (2017). Cost efï¬ciency performance of Indonesian banks over the recovery period: A stochastic frontier analysis. The Social Science Journal, 56(3), 377-389
Beck, T. (2006). Creating an efficient financial system: Challenges in a global economy, World Bank Working Paper, No 3856. Washington, D.C.
Bonin, J., Hasan, I., & Wachtel, P. (2005). Bank performance, efficiency and ownership in transition countries. Journal of Banking and Finance 29(1), 31-53.
Bottasso, A., & Sembenelli, A. (2004), Does Ownership Affect Firms Efficiency: Panel Data Evidence from Italy, Empirical Economics, 29, 769-786.
Charnes, A., Cooper, W., &Rhades, E. (1978). Measuring the Efficiency of Decision-Making Units, European Journal of Operational Research, 2(6), 429-444.
Coelli, T. J., & Rao, D. S. (2005). Total factor productivity growth in agriculture: A Malmquist index analysis of 93 countries, 1980–2000. Agricultural Economics, 32(1), 115–134.
Emishaw, B. (2016). Determinants of Commercial Banks’ Cost Efficiency in Ethiopia: A Stochastic Frontier Analysis. (Master Thesis). Addis Ababa University, Ethiopia.
Eskinder, W. (2013). Ownership Structure and Cost Efficiency of Commercial Banks inEthiopia: A Stochastic Frontier Analysis, Unpublished Paper. Addis AbabaUniversity Economics Department, Addis Ababa, Ethiopia.
Farrell, M.J., (1957). The Measurement of Productive Efficiency. Journal of the Royal Statistical Society. 120(3), 253-289
Frederic S. (2004). The economics of money, banking, and financial markets/ Frederic S.Mishkin. _7th Seven ed.
Fries, S., &Taci, A. (2005). Cost Efficiency of Banks in Transition: Evidence from 289 Banksin 15 post-communist countries. Journal of Banking & Finance, 29(1), 55-81.
GoE. (2010). ‘Growth and transformation plan (GTP) 2010/11 2014/15’, draft. Addis Ababa: Ministry of Finance and Economic Development, Government of Ethiopia.
Haque, A., & Tariq, A. (2012). Efficiency of banks in Pakistan: A Non Parametric Approach. Business and Economic Research, 2(1), 1-12.
Hughes, J. & Mester, L. (2008) Efficiency in Banking: Theory, Practice, and Evidence. Research Department, Federal Reserve Bank of Philadelphia, Working Paper No. 081.
Hundanol, A. (2012). How efficiently are the Ethiopian MFIS extending financial services to the poor? A comparison with the commercial banks. Journal of African Economies. 22(1), 112–135
Isik, I., & Hassan, M. K. (2002). Technical, scale and allocative efficiencies of Turkish banking industry. Journal of Banking & Finance, 26(4), 719-766.
Kanfer, R. (1990). Motivation theory and industrial and organizational psychology; Hand book of industrial and organizational psychology (2ndedn)., Palo Alto, CA. Consulting Psychologist press.
Keatinge, T. (2014). The role of public and private sector banking in Ethiopia’s future economic growth. Policy brief. Global Center on Cooperative Security: Building StrongPartnerships for a more secure world.
Lucchetti, R. L. Papi, A. Zazzaro (2001) Banks’ Inefficiency and Economic Growth A Micro- Macro Approach. Development Studies Working Paper no. 153, University of Oxford
Matthews, K. &Mahazir, I. (2006). Efficiency and productivity growth of domestic & foreign commercial banks in Malaysia, Cardiff Business School Working Paper Series.
Mester, L. & Allen, B. (2003). Explaining the dramatic changes in performance of US banks:technological change, deregulation, and dynamic changes in competition. Journal of Financial Intermediation, 2003, 12(1), 57-95
Mike, K.; Pietro, M.; Veronica, M.; Steve, M.; Bernard, M.; Dina, G.& Andy, N.(2007). Towards a definition of a business performance measurement systemFranco- Santos, Monica; International journal of operations and production management, 27(8), 784-801.
Misra, B. (2003). Allocative Efficiency of the Indian Banking System in the Post reform Period: A State Level Analysis. Reserve Bank of India, Occasional Papers Vol. 24, No.3, India.
Mohan, R. (2005). Financial sector reforms in India: Policies and Performance Analysis. Economic and Political weekly, 40(12), 1106-1121.
Muluneh, A. (2006). Cost Efficiency of Commercial Banks in Ethiopia: An Application of AStochastic Frontier Analysis. Addis Ababa, Ethiopia: A Paper Presented at the Fourth International Conference on the Ethiopian Economy Organized by the Ethiopian Economic Association.
Nigmonov, A. (2010). Bank Performance and Efficiency in Uzbekistan.Eurasian Journal of Business and Economics, 3(5), 1-25.
Omankhanlen, A. E. (2012). The role of banks in capital formation and economic growth: The case of Nigeria. Economy Trans disciplinarily Cognition, 15(1), 103–112.
PardeepKaur & GianKaur (2008). A study of cost efficiency of Indian commercial banks-An impact of mergers. African Journal of Business Management, 7(15), 1238-1249
Rama, K. & Tekeste, K. (2012). Cost Efficiency and Ownership Structure of Commercial Banks in Ethiopia. European Journal of Business and Management, 4(10), 36 - 47
Raphael, G. (2012). Commercial banks efficiency in Tanzania: A non-parametric approach. European Journal of Business and Management, 4(21), 55–67.
Raphael, G. (2013). Efficiency of commercial banks in east Africa: A non-parametric approach. International Journal of Business and Management, 8(4), 50–64.
Řepková, I. (2015). Banking efficiency determinants in the Czech banking sector. Procedia Economics and Finance, 23, 191–196.
Rostislav, S. (2015), Determinants of Bank Efficiency: Evidence from Czech Banking Sector Acta Universities Agriculture EtSilvi culturae Mendelianae Brunensis, 63(3), 1005-1011.
Sanderson, A. & Pierre, R. 2016). Evaluated the cost and revenue efficiency of the Zimbabwean banking sector during the period of 2009- 2014. Economic Research South Africa, ERSA, Working paper 629.)
Scott, S. & Timothy, K. (2006). Management of banking, 6th edition, Thomson Corporation USA.
Seelanatha, S. (2012). Drivers of technical efficiency of Sri Lankan commercial banks. International Journal of Applied Economics, 9(1), 41–58.
Sufian, F.(2008), Determinants of bank efficiency during unstable macroeconomic environment: Empirical: evidence from Malaysia. Research in International Business and Finance, 23(1), 54-77.
Tadele, T. (2016). Determinants of commercial banks efficiency: Evidence from selected Commercial Banks of Ethiopia. International Journal of Scientific and Research Publications, 6(5), 551–556.
Tadesse, Z. (2017), Determinants of bank technical efficiency: Evidence from commercial banks In Ethiopia. Cogent Business & Management, 4(1)
Tecles, T. (2010). Determinants of bank efficiency the case of brazil. Working papers Series brazil n.210 may 2010 p. 1-52).
Tesfay, T. (2016). Determinants of commercial banks efficiency: Evidence from selected commercial banks of Ethiopia. International Journal of Scientific and Research Publications, 6(5), 551–556.
Tochkov, K. and Nenovsky, N, (2011), Efficiency of Commercial Banks in Bulgatia in the Wake of EU Accession. International center for economic research, working paper series, No.21.
Usman, M., Wang, Z., Mahmood, F. & Shahid, H., (2010). Scale Efficiency in Banking Sector of Pakistan,International Journal of Business and Management, 5(4), 104-116.
Wang, H. (2008). Heteroscedasticity and Non-Monotonicity Efficiency Effects of A Stochastic Frontier Model, Journal of Productivity Analysis, 18, 241- 253
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Published
— Updated on 2020-08-31
How to Cite
Ereta, A. E., Bedada, E. Y., & Gutu, T. G. (2020). Determinants of banks’ cost efficiency: a case study of selected commercial banks, Ethiopia. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 8(3), 231 - 244. https://doi.org/10.22437/ppd.v8i3.9368
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