Are Saudi banks productive and efficient?

Abstract

PurposeThe purpose of this paper is to estimate the data envelopment analysis (DEA) efficiency scores and Malmquist productivity indices of banks in Saudi Arabia, an economy that is heavily dependant on the hydrocarbon sector.Design/methodology/approachThe paper adopts the intermediation approach of banking services where financial institutions like banks are perceived to be manufacturing units, employing inputs such as interest and non‐interest expenses to produce outputs such as net interest and non‐interest incomes. The research methodology is comprised of the DEA and Malmquist productivity index (MPI) as a measure of change in total factor productivity, reflecting industry's performance over time.FindingsThe results on MPI reflect an improvement in average productivity of banks. However, the major increase in productivity gains emerged through technological change relative to the efficiency change. The banks across the Kingdom appear to have succeeded in catching up with the best practices, even though the average scores on technical efficiency (TE) stood beyond optimal levels.Research limitations/implicationsThe question, whether small banks are more productive and efficient vis‐à‐vis large banks, remains unanswered. Likewise, to what extent the changes in oil prices and revenues affect the efficiency and productivity of banks, a second‐stage regression of efficiency on oil prices and revenues along with other variables would help in calculating the degree of impact. However, these are the agenda for subsequent research.Practical implicationsThe banks in Saudi Arabia need to rationalize their costs to line up across the efficiency frontiers.Originality/valueThe paper manages to explore the critical issues of TE and productivity changes across the banking sector in Saudi Arabia. It provides valuable insights to both the bank executives and public policy makers, who are seeking for improvements in efficiency, productivity, and competitiveness across the banking sector in the Kingdom.