Assessing Bank Performance Using Malmquist Productivity Index Approach and One-Step System GMM Dynamic Panel Data Model

Abstract

This article evaluated the total factor productivity of Ethiopian banks from 2011 to 2020 using the DEA-based Malmquist productivity index and one-step system GMM dynamic data approaches. The study covered the 14 banks that were operational during the study period and examined the regressive, stable, and progressive nature of their productivity taking into account both the production and intermediary role of banks. We used constant returns to scale to compare the efficiency and productivity and establish a benchmark for bank performance. Interest expense, operating non-interest expense, and deposits were used as input variables and interest income, operating non-interest income, and loan and advances as output variables to analyze the productivity change of banks in their production role while deposits and loans were used as input and output variables, respectively to study productivity change of banks in their intermediation role. The study concludes nominal efficiency change both due to improved operations and management practices as well as increased economies of scale and deterioration in technological efficiency. We also conclude nominal regress in total bank factor productivity during the study period and a regressive, and progressive impact of technology, and improved management practices on the productivity of Ethiopian banks, respectively. Consequently, we suggest a thorough feasibility study in the technology choice of banks.