Determinants of bank technical efficiency: Evidence from rural and community banks in Ghana

Michael Adusei,David Mcmillan

doi:10.1080/23311975.2016.1199519

Abstract

AbstractWhat are the determinants of the technical efficiency of rural and community banks in Ghana? This paper addresses this question with data from 101 rural and community banks in Ghana. Data envelopment analysis based on the variable return to scale assumption and binary logistic regression technique has been used for analysis. The results show that only 20 rural and community banks are technically efficient. The binary logistic regression analysis provides evidence that size, profitability, and bank funding quality are significant determinants of technical efficiency in the rural banking industry in Ghana. Whereas an increase in the size and funding quality of a rural bank results in a decrease in its technical efficiency, an increase in the profitability of a rural bank improves its technical efficiency. It can be inferred from these results that the resource utilization of many rural and community banks in Ghana is weak and that the resource utilization performance of a rural bank can be assessed ...

Highlights

There is no doubt that the instability of the banking sector poses a serious threat to the foundations of every economy
This paper explores the factors that explain the variations in the technical efficiency (TE) of rural and community banks (RCBs) in Ghana using data envelopment analysis as well as binary logistic regression technique
Predictors of TE in the rural banking industry in Ghana have been investigated with 2013 data from 101 RCBs

Summary

Introduction

There is no doubt that the instability of the banking sector poses a serious threat to the foundations of every economy. The paper shows that only 20 out of the 101 rural and community banks (RCBs) used for the study are technically efficient and that the TE of a rural bank in Ghana is influenced by its size, funding quality, and profitability. Sufian (2009) provides evidence in support of the skimping hypothesis with a study that reports a negative statistically significant relationship between credit risk and bank TE. Evidence from Sufian (2009) shows that management quality/efficiency has a negative, statistically significant relationship with TE Is this hypothesis sustainable in the rural banking context?. Does funding quality promote or hurt the TE of a rural bank?

Methodology

Findings

Conclusion and recommendations