Analyzing Cost and Alternative Profit Efficiency of Private Commercial Banks in Ethiopia: A Stochastic Frontier Approach
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Date
2007-03
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A.A.U
Abstract
This paper attempts to examine the cost and alternative profit x-efficiency level and the
factors that may influence the x-efficiency level of the private commercial banks in
Ethiopia, by employing stochastic frontier approach. The data is obtained from audited
financial statement of six private commercial banks between year 2000 and 2005, various
NBE annual reports and interviewing different private bank officials.
The study employed stochastic frontier approach using translog functional form, which is
commonly used in similar studies to represent the data. The study found that the mean
level of cost and alternative profit x-efficiency of private commercial banks were 81
percent and 70 percent respectively. This indicates that private commercial banks
incurred approximately 19 percent more cost than necessary and lost approximately 30
percent of their potential profits with in the sample period due to x-efficiency. This
implies that there exists an immense room for improvement in cost and alternative profit
x-inefficiency of private commercial banks with out employing additional resources.
The study also revealed that the effect of operational specific variables, market specific
variables, macro variables and risk variable were plausible in explaining predicted cost
and alternative profit x-inefficiency. Any policy implication designed by the banks
management and policy makers to improve the efficiency level of the private commercial
banks should consider the impact of those influencing factors .
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Keywords
Analyzing cost, Alternative profit efficiency, commercial banks, Ethiopia