Abstract
This paper reports institutional factor effects on bank efficiency in Middle Eastern and North African countries during a recent 14 years. The methods used are: Stochastic Frontier Analyses and second-stage Tobit regression to investigate the impact of institutional-cum-financial as well as bank-specific variables on efficiency. Overall, the analysis shows that banks could save 20 percent of their total costs if they were operating efficiently. Factors that affect production efficiency are: macroeconomic stability, financial development, the degree of market competition, legal rights and contract laws, better governance and political stability. Differences in technology seem to be crucial in explaining efficiency differences. Our findings point to the importance of policies that aim to build stronger institutions, promote more competition, and improve governance. Policies should be aimed at giving banks incentives to improve their capitalization and liquidity. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency, areas of immediate concerns for this vast region. Finally, increased investments and upgrading of the stock markets in the region would help banks improve their performance through market-based investor actions.
Highlights
A large number of developed and developing countries have deregulated their banking systems over the past two decades: see Ariff and Can (2008)
We focus on the cost efficiency of the banks, and rely on the stochastic frontier analysis (SFA) to compute the efficiency score document the difference between bank's actual cost efficiency levels relative to an economy’s cost efficiency production frontier in the spirit of the studies that have focused on these newer research method away from accounting measures of efficiency
Because of deficiency in capital market and other financial institutional operations and development, Middle East and North African (MENA) country banks play a central role in the financial intermediation process
Summary
A large number of developed and developing countries have deregulated their banking systems over the past two decades: see Ariff and Can (2008). The primary objective of such reforms was to improve productivity, efficiency, and profitability of the banking systems and to increase international competitiveness. Developing countries, mostly following International Monetary Fund (IMF) and/or World Bank initiated programs, sought to improve performance. International Journal of Banking and Finance, Vol 9, Iss. 4 [2012], Art. 3 and efficiency of financial sectors to enhance their overall economic performance. A strong and stable banking system has been advocated as being the cornerstone in many liberalization programs (Saunders and Sommariva, 1993). This is pertinent for the region studied. Banks have used new financial technologies to provide new services, to evaluate risks more efficiently, and to unbundle and repackage risks in new ways
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