Small business lending and bank cost efficiency

Abstract

This study uses data information of 43 Taiwan’s commercial banks for the period from 1998 to 2000 and adopts the model of frontier function introduced by Battese and Coeill (1995) to evaluate banks’ cost inefficiency indices and to test the relationship between cost inefficiency and small business lending. According to the empirical results in this study, there are two identifiable findings as follows: (1) Based on the each year efficiency indices, the five most efficient banks provide lending to small business less than 5% of their total lending. However, the five least efficient banks have more than 50% of lending to small business compared to their total lending. This indicates that the higher lending percentage to small business, the less efficient. (2) There is a positive relationship between cost inefficiency and small business lending, i.e. if a bank provides more lending to small business. its cost inefficiency becomes worse.