Efficiency-Risk Interplay in Banking: Theoretical Insights and Empirical Evidence from Ethiopia
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Date
2025-09-25
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AAU
Abstract
Efficiency-Risk Interplay in Banking: Theoretical Insights and Empirical Evidence from
Ethiopia
Daniel Tolesa Agama
PhD Dissertation
Addis Ababa University (2025)
This study examines the interplay between technical efficiency and risk in 17 Ethiopian
commercial banks over 2014–2022. Technical efficiency is measured using bias-corrected
Data Envelopment Analysis under the Charnes–Cooper–Rhodes (CCR) constant returns to
scale and Banker–Charnes–Cooper (BCC) variable returns to scale specifications.
Efficiency differences by ownership and size are compared via Mann–Whitney U tests.
Dynamic panel estimations—Difference Generalized Method of Moments and fixed-
effects models—assess (a) the effects of credit risk and liquidity risk on efficiency, and (b)
the effects of efficiency on subsequent credit and liquidity risks. Profitability (return on
average assets), capital adequacy ratio, and bank size are included as additional efficiency
determinants. Findings indicate that higher credit and liquidity risks significantly increase
technical efficiency, while greater efficiency leads to elevated subsequent credit and
liquidity risks. Profitability positively affects efficiency; capital adequacy has no
significant effect; and larger banks exhibit slightly lower efficiency. Public banks
underperform private peers in overall and scale efficiency yet exceed them in pure technical
efficiency. These results support Financial Intermediation Theory and the Skimping and
Moral Hazard hypotheses and reject the Bad Management hypothesis for public banks.
Banks should integrate robust risk controls with efficiency initiatives, and regulators
should consider these interplay effects when formulating policies