Factors Affecting Technical Efficiency: Evidence from the Banking Industry in Ethiopia
No Thumbnail Available
Date
2023-06-07
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
The efficacy of private banks in Ethiopia from 2016 to 2021 was the focus of this research,
investigating the factors impacting their technical efficiency. Output variables such as loan,
investment, and net profit were considered to gauge technical efficiency, while input
variables like paid-up capital and total deposit were used. A binary logistic regression was
used to identify the technical efficiency predictors of the banks. The results revealed that only
five of the sixteen banks studied (31.3%) met the technical efficiency standards, while the
majority (68.7%) performed beneath the optimal production frontiers. Consequently, these
banks may need to prioritize enhancing their productivity to improve their operations. The
efficiency trends of private banks were not consistent, showing better efficiency in 2017, then
sharply declining in 2018 and 2019, and gradually improving in 2021. Furthermore, tier I
banks were relatively efficient than tier II and tier III banks. In addition, a positive and
significant relationship was found between returns on assets and technical efficiency measure
of private banks. On the other hand, a negative statistically significant relationship was
observed between solvency and technical efficiency, which implies that the higher the debt
obligation for a unit asset, the less likely that the bank is technically efficient. Therefore,
banks may need to increase loan creation capacity and improve return on assets to enhance
their technical efficiency. Additionally, careful planning of the solvency ratio of banks is also
recommended.
Description
Keywords
Technical Efficiency; Intermediation Approach; Data Envelopment Analysis; Logistic Regression; Commercial Banks in Ethiopia