College of Business and Economics

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Browsing College of Business and Economics by Author ". Zewde, Shibrie(Dr)"

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    Linking Relative Efficiency and Operating Financial Decisions of Commercial Banks in Ethiopia: Application of Data Envelopment Analysis Model in conjunction with Financial Ratios.
    (A.A.U, 2002-02) Habtamu, Eshetu; . Zewde, Shibrie(Dr)
    Banking institutions perform inter mediation functions and consequently influence the level of money stock through their ability to create deposit liabilities. Therefore, it is critical for depositors, investors, regulators, and the public at large to have vested interest in the performance of banking institutions. Performance evaluation of bank should be linked to decision models so as to associate the results obtained with the decision. To this end, this study initiated with the objective of accurately classifYing the commercial banks in Ethiopia based on their relative efficiency scores has also identified the major financial operating decisions that lead them to better performance. Introducing the Data Envelopment Analysis model is also the purpose of this study. To sum up, the primary purpose is to demonstrate through this empirical evidence that DEA in conjunction with financial ratio analysis can effectively aggregate and reclassifY the perplexing ratios into meaningful financial dimensions, which enable us to gain insight into the financial operating strategies of banks. DEA is the index of sum of weighted outputs to sum of weighted inputs. This model is used to classifY six commercial banks in Ethiopia - those have operated in the industry for at least two years before 2000 - based on their relative efficiency scores. While others may not agree with the input and output variables selected in this study for the DEA model, this study uses interest income, non-interest income, and total loans as outputs and Interest expenses, non-interest expenses, and total deposits as inputs. The financial operating decisions like capital · adequacy, profitability, asset utilization, and liquidity for 1995 to 1999 are also captured through twelve financial ratios extracted from the banks' financial statements. For the purpose of this study efficiency is defined as an 'intermediary approach' which examines the bank's function as a financial intermediary between savers 'and borrowers. According to the DEA efficiency score derived, this study divides the banks into three categories - high, medium, and low DEA efficiency - for financial peer group analysis. The empirical results indicate that those banks with higher DEA scores also have higher ratios in capital adequacy, asset utilization and profitability efficiency, and lower ratios in financial leverage and liquidity than those with lower DEA scores. That is banks with more capital (in a relative magnitude) tended to engage in higher loan risk lending for higher profits; while those with less capital were more conservative in lending money. This shows that the application of DEA in conjunction with financial ratios can not only accurately categorize banks with respect to each other in terms of their DEA efficiencies but can also somehow link the evaluated efficiencies with the bank's actual financial operating decisions.