DETERMINANTS OF COMMERCIAL BANKS EFFICIENCY IN ETHIOPIA: A STUDY OF DATA ENVELOPMENT ANALYSIS (DEA) APPROACH

Abstract

Banks are the most crucial financial intermediaries in countries economy and that have technically efficient banking industry are better able to withstand negative shock and contribute to the stability of the whole economy. The main objective of this study is to investigate determinants of commercial banks’ efficiency in Ethiopia by using panel data of thirteen commercial banks which are enrolled throughout the study period from year 2011 to 2020. For this purpose, the study used secondary data from the annual reports of the commercial banks, National Bank of Ethiopia and Ministry of Finance and Economic Cooperation. To estimate the technical efficiency score Data Envelopment Analysis (DEA) approach was employed on input variables (interest expense, operating expense and customer’s deposit) and output variables (interest income, non-interest income and loan). The estimated technical efficiency score indicated that, there is significant technical efficiency variation among the commercial banks in Ethiopia. The cumulative technical efficiency over the study period had recorded 97% OTE, 98% PTE and 99% SC scores. Factors which considered as the determinant for the technical efficiency are categorized as, bank-specific, industry-specific and macro-economic factors. The analytical result of Panel Tobit regression model reveled that return on asset, credit risk, liquidity risk, and economic growth / GDP/ are found to have significant effect on the TE. While bank size, level of capitalization, market share and inflation rate are variable with insignificant effect on commercial banks’ TE. This result suggest for the banks’ management and policy makers to give high concern on the internal and external factors of efficiency which are highly significant variables to set direction to smart resource manage and technically efficient banking system