Cost Efficiency of Ethiopian Banks

Abstract

The study has explored the efficiency level of banks using cost models. It has used the
Data Envelopment Analysis score to examine the efficiency level of banks under both
constant and return of scale. In addition, it has explored the scale efficiency of all the
models with a statistical test on the significance of variation among Ethiopian Banks.
The study finds that banks efficiency level has witnessed a wide variation across
various bank groupings. The study has also found outs that the state banks efficiency
has been consistently on the efficiency frontier reflecting the high dominance of the
banks in the Ethiopian banking system. In addition, the study finds that the small
private banks efficiency is growing overtime while the middle size private banks are
facing difficulty to improve their level of efficiency. The parametric and nonparametric
tests also witness that state and private banks possess different
management and technology capabilities. This shows that despite the scale advantage
the state banks have, the difference in their management and technology capabilities
has contributed for better efficiency performances. On the other front, the statistical
test on efficiency determinants shows that deposit growth rate, loan size and earning
asset growth are positively and significantly related to efficiencies. Nevertheless,
branch size and fixed asset growth rate are negatively and insignificantly related to
efficiencies. Consistent to such finding, the benchmarking practice suggests that banks
holding excessive deposits limiting their intermediation activities are disadvantaged to
count on their efficiency performances. Some of the results from this section of the
study such as top efficiency score of state banks and efficiency determinants are
unexpected and are explained further in the qualitative study as to their reasons.