Performance Efficiency of Ethiopian Commercial Banks: Data Envelopment Analysis Approach

Abstract

The Ethiopian banking sector plays a pivotal role in resource allocation of the country with the absence of a securities market. The study aimed to evaluate financial performance of Ethiopian commercial banks during 2014 to 2020. Data from all of the 17 commercial banks in Ethiopia have been considered in the study which resulted in 119 observations. The classical Data Envelopment Analysis (DEA) models were employed to estimate the efficiency scores. Two input variables (non-interest expense and deposits), and three output variables (net interest income, non-interest income and loans and advances) were identified under intermediation approach. The efficiency scores of Ethiopian commercial banks vary among each banks and years. The highest ranked commercial banks based on the average relative efficiency score are the most stable and consistent banks in the industry. The public owned commercial bank is more efficient than private owned commercial banks in Ethiopia. Whereas, the smallest private owned commercial banks are more efficient than the largest one. Thus, bank managers should review and rescale their scope of operations to levels that guarantees both pure technical efficiency and scale efficiency. Future studies should evaluate the efficiency of Ethiopian commercial banks overtime using parametric analysis and identify factors affecting their financial performance.