Efficiency Analysis of Foreign and Domestic Banks and its Determinants: Evidence from Gulf Cooperation Council (GCC) Countries

Abstract

This paper aims to assess the foreign and domestic banks efficiency and its determinants in Gulf Cooperation Council (GCC) countries. In total, 50 foreign and domestic banks were examined for the period of five years from 2015- 2019. The two stage procedures approach was used by this paper to analyse banks efficiency. First input- oriented Data Envelopment Analysis model was used to analyze the efficiency scores and in the second Tobit regression model was applied to investigate the efficient drivers. Furthermore, nonparametric Kruskall-Wallis and Mann Whitney tests and the parametric (t-test) were applied to compare the efficiency between foreign and domestic banks. On average, the findings showed that many domestic and foreign banks in GCC countries were inefficient with mean efficiency scores of less than 100%. The overall banks inefficiency could be explained by managerial inefficiency in exploiting their resources to the fullest; second domestic banks groups on average were more efficient than foreign banks groups supporting home field advantage theory. Finally the multivariate regression analysis highlights that; bank size, credit risks, management quality and liquidity were the most significant efficiency drivers. The findings were useful to the regulators and bankers in GCC countries on operating performance of banking industry and its future evolution. The study results were important because the study pinpoints the drivers of efficiency and its sources of inefficiency, it would help regulator and banks with strategic planning. This will assist the countries to maintain a healthy and sustainable financial system in an economy.