Measurement of Banks Efficiency in Emerging Economices

Abstract

The objective of the study was to measure the risk-adjusted efficiency of 918 banks operating in 24 emerging economies for the period of 1999-2013. This study was taken into account the undesirable outputs, i.e. non-performing loans while considered the sequential nature of banking operations to measure more robust efficiency estimates. To achieve this objective, the study employed a directional distance function technique based on network DEA approach. The study concluded that overall average efficiency of banks increased as NPLs was incorporated in the model. The risk-adjusted efficiency of banks was 0.80 points. The study performed three equality of distributions test. First, it made comparative analysis of efficiency scores with and without incorporating undesirable outputs in modeling. The distributions of efficiency scores were significantly different when credit quality was taken into account. Second, the study found significant difference between efficiency scores of deposit mobilization stage and loan financings stage. Third, it compared the efficiency scores in pre-crisis and post-crisis period and reported significant difference at 1% level of significance. The results of a follow-on non-parametric regression found that smaller, better capitalized and private banks were more efficient. The conditions conducive for high levels of technical efficiency by banks were found to be characterized by economic growth and low inflation. The financial crisis of 2007–2008 impacted more adversely the regions that had higher proportions of non-performing loans in banks‟ portfolios. However, the empirical findings of the study had fundamental implications for policy makers, such as (i) the banks need to be sufficiently capitalized (ii) Central banks need to play their role in discouraging the accumulation of non-performing loans and (iii) good macroeconomic management that keeps inflation low and stimulate growth provides the environment in which the bank can perform efficiently.