Determinants of bank technical efficiency: Evidence from commercial banks in Ethiopia

Abstract

The main objective of this study is to examine the determinants of the technical efficiency of commercial banks in Ethiopia over the period from 2011 to 2014. For this purpose, the study used secondary data from the annual reports of the commercial banks in Ethiopia under study. To estimate the technical efficiency score DEA was employed on input variables (interest expense, operating expense and deposit) and output variables (interest income, non-interest income and loan). The estimated technical efficiency score indicated that, Under the constant returns to scale assumption Abay bank, Construction and Business bank and Cooperative bank of Oromia are found to be less efficient, while Nib international bank and Oromia international bank are found to be more efficient. Under the variables returns to scale assumption Construction and Business bank, Abay bank and Cooperative bank of Oromia are found to be less efficient while Oromia international bank, Awash international bank and Wegagen bank are found to be more efficient. It is also confirmed that Oromia international bank and Nib international bank are the most scale efficient commercial banks in Ethiopia compared to the commercial banks incorporated in the study while Berhan international bank and Awash international bank are the least scale efficient banks. A Tobit model is used to examine the determinants of technical efficiency. Accordingly, it is found that level of capitalization, liquidity risk, return on asset and market share are found to have positive and significant effect on the technical efficiency score.

Keywords

• technical efficiency
• intermediation approach
• data envelopment analysis
• tobit model
• commercial banks in ethiopia