Banking efficiency and its determinants in selected frontier african markets

Abstract

The degree of banking efficiency is of key importance as this has significant implication on the stability of financial systems and ultimately impacts on an economy. In this paper, we extend the existing literature by measuring the degree of bank efficiency in ten frontier African countries. We also attempt to analyse the determinants of banking efficiency in the sample countries. We employ a bank-level panel data set over the period 2008–2012 to measure banking efficiency in a two-stage procedure. In the first stage, we use the Data Envelopment Analysis technique to estimate technical, pure technical and scale bank efficiency. In the second stage, we use Simar and Wilson (J Econom 136:31–64, 2007) truncated bootstrapping approach to analyse the determinants of banking efficiency. The results of our analysis show that, to a greater extent, banks in the countries studied have efficient banking sectors. The results of truncated regression indicate that bank size is negatively related to banking sector efficiency while the degree of risk is positively related bank efficiency. Overall, the present study provides empirical information that may be used to guide future financial reform policies in the Frontier African countries.