Determinants of Efficiency of Commercial Banks in Ethiopia

Abstract

Ethiopian bank sector reform measures were implemented to generate a more competitive and efficient banking sector. However, total capital and interest income may suggest greater inefficiencies in the banking industry. This paper analyses the developments and main determinants of bank efficiency in the Ethiopian banking industry during 2005-2015. The Data Envelopment Analysis (DEA) methodology is applied to obtain efficiency estimates and then a Tobit model is run to find its main determinants. The first result indicates that the Ethiopian banking sector experienced average inefficiencies for the period of study of 1%, 2% and 1% for Technical Efficiency (TE). In particular, an increase in bank efficiency is observed from 2005 to 2007, however, a decline in the efficiency levels is found from 2008 to 2011, although a recovery in efficiency is observed from 2012 onwards. Furthermore, the main determinants of increased bank efficiency are loan intensity, net interest income, non-interest income, size and degree of capitalization; on the other hand, non-interest expenses reduce bank efficiency