Relative Input and Output Efficiency and Productivity of Private Commercial Banks in Ethiopia: Wegagen Bank

Abstract

The result of this paper shows the relative input and output efficiency and change in total factor productivity of private commercial banks in Ethiopia. The analysis conducted on the three-year data collected from the fourteen private commercial banks and is composed of eight variables. The study adopted “intermediation” approach that is the primary role of banks in business intermediating between savers and investors; in other words deposit collection and loan provision and investments. The selected eight variables are Salary and Benefit, Interest Expense, Office Rent, Promotion and Advertisement,Expense on Fixed Asset, Total Deposit, Loan and NBE Bill. The variables organized in to two different but appropriate input-output combinations of deposit collection and allocation of the collected deposit. The data analyzed using a statistical model called Data Envelopment Analysis (DEA), and generic model called Malmquist analysis, which is one of the up-to-date and most appropriate efficiency measurement tools for the banking sector. The two categories analyzed at three-year aggregate level; at yearly level and at Big Six banks level. The result has four parts; Efficiency; Proportional movement and Projection of inputs and/or outputs for inefficient banks; Sensitivity Test and measurement of Total Factor Productivity changes. The average efficiency result shows inefficiency of private commercial banks, however, few banks are efficient in deposit collection and allocation of resources. The Sensitivity tests identified no outlier(s), i.e. no super-efficient or super-inefficient bank. Change in productivity analysis, i.e. the year-to-year change in relative productivity of variables, found out that at aggregate level the main productivity contributing factors are smaller change technologies i.e. introduction of new way of doing. However, the result is mixed when looked at individual banks, which means for some banks technical efficiency is the driving force in change in productivity