Browsing by Author "Zeray Heruy"

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    Cost Efficiency, Credit Risk-Taking and Capital Adequacy: an Empirical Study on Ethiopian Commercial Banks
    (Addis Ababa University, 2015-06) Zeray Heruy; Berhanu Habtamu
    The purpose of this study is twofold, first to investigate the cost efficiency level of Ethiopian commercial banks; and second, to analyze the relationship between cost efficiency, credit risk- taking and capital adequacy based on the notion of causality. Balanced panel data from samples of eight banks which have data for the period 2000 to 2014 have been used. The study applied Stochastic Frontier Analysis (SFA) techniques provided by Battese and Coelli (1995) to investigate the banks‟ cost efficiency level and Granger causality techniques to analyze causal relationship among cost efficiency, credit risk-taking and capital adequacy. The findings of the study highlight that the average cost efficiency level of the studied commercial banks is 89 percent. At individual bank level, Ethiopian Commercial Bank (CBE) is the most cost efficient while Construction and Business Bank (CBB) is the least cost efficient. State ownership has negative impact on cost efficiency due to the averaging effect of the two studied state owned commercial banks. Bank size has positive impact on cost efficiency indicating that large banks on average tended to be more cost efficient than small banks. With regard to the causal relationship, the results of the Granger model show that negative and bidirectional causality exists between cost efficiency and credit risk-taking supporting both the “luck” and “bad management” hypotheses. The study also shows that improvement in cost efficiency Granger cause increase in capital adequacy level. Capital adequacy and credit risk-taking also have bidirectional causality supporting both “luck” and “moral hazard” hypothesis. Overall, the results of the Granger model indicate that the severity of one of the three variables may increase unless the other is carefully managed. Key words: Cost efficiency; Credit risk-taking; Capital adequacy; Granger causality; Stochastic Frontier Analysis; System GMM