Efficiency Analysis of Commercial Bank Branches: The Case of Berhan Bank Sh. Co.

Abstract

Ensuring efficiency is critical for banks to continually play their role of
financial intermediary in mobilizing financial resources and channeling
towards productive investment ventures. Thus, this study investigates and
discusses on the operating efficiency of 61 branches in Berhan bank between
years 2015 and 2020. Secondary data from the internal reports of the Bank
were used. A non-parametric linear programing model Data Envelop Analysis
(DEA) was employed on input variables (personnel expense and other
operating expense) and output variables (annual deposit collected) focusing on
output-oriented comparison to estimate the operating efficiency of branches.
The finding indicates that both technical and scale efficiency of the branches
were very low, with an average 31% and 71 %, respectively and it’s below the
best practice frontier of 1 (100%). Meanwhile, 99 percent of the branches
operating at an increasing economy of scale. Therefore, most of the branches
are operating below the best practice production frontiers and they have the
capacity to improve productivity by 29 percent. By geographic location, Addis
Ababa city branches have relatively better efficiency compared to branches
located in other regions. Looking at the seasonality of branches, the seasoned
ones have better average efficiency than their newest counterparts. Therefore,
it is recommended that the Bank should design effective deposit mobilization
strategy that networks potential market segments, implement branch
standardization by focusing on selection of appropriate benchmarks, attain the
branches’ most productive scale size through the elimination of scale
inefficiencies ,with minimal changes to branches ‘scale size ( revise overall
planning process), on branch level resource allocation, invest on managerial
skill of personnel to improve branch level leadership and launch technology
banking.