Abstract
The paper investigates the efficiency of the major banks of South Africa using the standard and alternative approaches to Data Envelopment Analysis (DEA). The standard DEA approach measures efficiency utilising linear averages of outputs and inputs while the alternative DEA approach utilises nonlinear averages. Individual bank efficiency scores are estimated over the period 2006 to 2012, a period that allows analysis of the efficiency of the banks during the global financial crisis of 2008 to 2009. Under both approaches the majority of the major South African banks were observed to be DEA efficient, with the alternative approach improving the efficiency scores of those banks that were DEA inefficient under the standard approach. The global financial crisis did not affect the efficiency of the majority of the banks. Since the banks were DEA efficient prior the crisis, it could be argued that their efficiency was one of the contributory factors for their resilience during the global financial crisis.
Highlights
Despite there being extensive research in measuring efficiency in financial institutions, there is no generally accepted best method (Frimpong, 2010)
This paper presents the individual efficiency scores of the five major banks listed on the JSE – Barclays Africa, Capitec bank, FirstRand bank, Nedbank and Standard Bank –that represents over 85% of the South African banking sector
The paper has investigated the efficiency of the major banks of South Africa using the standard and alternative approaches to Data Envelopment Analysis (DEA)
Summary
Despite there being extensive research in measuring efficiency in financial institutions, there is no generally accepted best method (Frimpong, 2010). As to what approach best measures bank efficiency is still an unresolved question though the DEA approach pioneered by Farrell (1957) is increasingly being preferred (Ferrier &Lovell, 1990; Berger &Humphrey, 1997). Some middle-income countries like South Africa, the subject of this study, have relatively complex financial systems, with well-developed banks and available data that allow insights into their operation and efficiency to be studied. Illustrating the significant role banks play in the economy, Botha and Makina (2011) report that the gross value added of the financial sector in South Africa is about 10.5% of GDP in which bank assets alone constitute 127% of GDP
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