2023 CEF ABdulahi - Factor Affecting Technical Efficiency of The Banking Sector Evidence From Ethiopia

Cogent Economics & Finance
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Factor affecting technical efficiency of the banking

sector: Evidence from Ethiopia
Salah Mohammed Abdulahi, Mekonnen Kumlachew Yitayaw, Habtamu

Legese Feyisa & Wondmagegn Biru Mamo
To cite this article: Salah Mohammed Abdulahi, Mekonnen Kumlachew Yitayaw, Habtamu
Legese Feyisa & Wondmagegn Biru Mamo (2023) Factor affecting technical efficiency of the
banking sector: Evidence from Ethiopia, Cogent Economics & Finance, 11:1, 2186039, DOI:
10.1080/23322039.2023.2186039
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Abdulahi et al., Cogent Economics & Finance (2023), 11: 2186039
https://doi.org/10.1080/23322039.2023.2186039
FINANCIAL ECONOMICS | RESEARCH ARTICLE

Factor affecting technical efficiency of the
banking sector: Evidence from Ethiopia
Salah Mohammed Abdulahi1*, Mekonnen Kumlachew Yitayaw2, Habtamu Legese Feyisa1 and
Wondmagegn Biru Mamo2
Received: 08 August 2022
Accepted: 24 February 2023 Abstract: An efficient bank is more robust to shocks, fosters competitiveness, and
promotes stability of the financial system. This study estimates Ethiopia’s commercial
*Corresponding author: Salah
Mohammed Abdulahi, Department of banks’ level of efficiency and its determinants during the period 2014–2020. Data
Economics, College of Business &
Economics, Haramaya University,
Envelopment Analysis (DEA), Malmquist DEA, and Tobit regression were employed to
Dire Dawa, Ethiopia analyze the data. The result indicated that the average efficiency score of banks in the
E-mail: [email protected]
constant returns to scale (CRS), variable returns to scale (VRS), and scale efficiency (SE)
Reviewing editor:
David McMillan, University of Stirling,
models were 95.5%, 99.85%, and 96.95% , respectively. Furthermore, in the VRS model,
Stirling, United Kingdom a state bank is more efficient than private banks. During the study period, the Total
Additional information is available at Factor Productivity (TFP) of Banks improved by 1%. According to the Tobit model, the
the end of the article
efficiency of banks grows with an increment in the number of branches, bank size, and
credit risk. However, when, liquidity risk and the log of the fixed asset increase, bank
efficiency will decrease. The level of capitalization, log of GDP, and inflation, on the
other hand, do not influence bank efficiency. Therefore, banks should pay close atten
tion to aspects that influence technical efficiency.
Subjects: Public Finance; Corporate Finance; Banking
Keywords: Bank efficiency; DEA; CRS; VRS; SE; Malmquist Index; Tobit
JEL Classification: G21; G24; G32
ABOUT THE AUTHOR PUBLIC INTEREST STATEMENT

Salah Mohammed Abdulahi was born in 1988 in This paper measures factors affecting the tech
Harar, Ethiopia. He earned a Bachelor of Art in nical efficiency of commercial banks of Ethiopia
Economics from Jimma University in 2008 and a using the nonparametric frontier DEA and Tobit
Master of Science in Development Economics model. The paper also estimates the total factor
from Dire Dawa University in 2018. He is currently productivity of the output using the Malmquist
a lecturer in the department of economics at index. The result indicates that the number of
Haramaya University, Ethiopia. His professional branches, bank size, credit risk, fixed assets, and
interests include measuring institutional produc liquidity risk are the most important factors that
tivity and efficiency, as well as assessing the must be considered in determining the technical
impact of development programs. He published efficiency of commercial banks in Ethiopia. On
one paper entitled “The Three-Dimensional the contrary, the study reveals that capitaliza
Impacts of Governance on Economic Growth: tion, inflation, and GDP growth are not important
Panel Data Evidence From The Emerging Market” to determine the technical efficiency of com
Salah Mohammed and currently he is leading a research project mercial banks in Ethiopia. Further, factor pro
Abdulahi dealing with the impact of urban productive ductivity of commercial banks has improved
safety net program on poverty reduction in major throughout the study period. Thus, decision-
cities of Eastern Ethiopia. makers should take into account bank specific
and macroeconomic variables to improve the
efficiency of banks.
© 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
Page 1 of 26
1. Introduction
In the economic growth and stability of a country, banks have an important role. They help in
channelizing household savings to corporations and industries where it is optimally used for the
development of the country. As financial institutions improve their efficiency and productivity in
channelizing financial resources, they will bring value to the economy as a whole. Further, they
should perform efficiently in converting their costly inputs into a variety of financial products and
services to serve the aforementioned role effectively. According to Adusei and McMillan (2016),
“Only strong technically efficient and profitable banks can promise a realistic return to their
stakeholders and reduce the probability of bankruptcy.” As a result, it is important to investigate
efficiency levels and identify factors determining bank performance. In Ethiopia, the financial
market is developing and plays a key role in mobilizing funds. Moreover, banks dominate
Ethiopia’s financial sector, with total banking capital of Birr 85.5 billion and fresh loan disburse
ments of Birr 271.2 billion, up 14.8% from a year before (National Bank of Ethiopia, 2020). Thus,
with the increase in the number of commercial banks and rapid changes in the financial environ
ment, assessing determinants of banking efficiency is a major issue.
DEA and Tobit models are common methods in the banking literature that are used to measure
technical efficiency. Such studies include Sarsour and Daoud (2015), Karimu Tossa (2016), Hamid
et al. (2017), R. Banya and Biekpe (2018), and Banna et al. (2019), and Jiménez-Hernández et al.
(2019), and Cheriye (2020), and Jelassi and Delhoumi (2021).
Though there are many studies that examine the determinants of bank efficiency, little effort has been
made to study the efficiency of banks in Ethiopia. Studies by Lelissa (2014), Tesfay (2016), Zenebe Lema
(2017), and Dinberu and Wang (2018) have tried to measure the efficiency of commercial banks in
Ethiopia. However, these articles are unable to incorporate relevant bank-specific explanatory variables
like the number of branches and macro-specific variables like inflation and GDP in their efficiency model.
Based on the findings of Jelassi and Delhoumi (2021), Ofori-Sasu et al. (Ofori-Sasu et al., 2019), and
Trabelsi and Trad (2017) the aforementioned variables have a significant impact on determining the
efficiency level of commercial banks.
Furthermore, previously conducted research did not measure factor productivity change on
outputs of Ethiopian commercial banks. In addition, the data used in the aforementioned articles
were too old for observing the current performance of banks in the dynamic financial world. In
particular, Zenebe Lema (2017) made his analysis by using data from 2011 to 2014 and he failed
to take into account the efficiency of three commercial banks, namely Enat Bank, Debub Global
Bank, and Addis International Bank.
As a result, our study used the DEA and Tobit models to estimate the efficiency score and factor
productivity changes and investigate factors that affect the technical efficiency of commercial
banks in Ethiopia over the years 2014 to 2020. Therefore, this research could be crucial in under
standing the technical efficiency score, changes in factor productivity, and variables affecting the
technical efficiency score of commercial banks in Ethiopia. Furthermore, this study will be useful in
providing a better foundation for bank managers, business professionals, and policymakers to
improve the overall efficiency of the financial sector.
2. Literature review
Theoretical measurement of efficiency for decision-making units could be either parametric or
nonparametric techniques. The parametric techniques such as the Stochastic Frontier
Approach (SFA) or Distribution-Free Approach (DFA) were used to measure efficiency. The
nonparametric technique includes mainly data envelopment analysis (DEA) and Free Disposal
Hull Analysis (FDH). Empirically, a large volume of studies were conducted on the factors
affecting the technical efficiency of commercial banks in various countries. For instance,
Řepková (2015), R. Banya and Biekpe (2018), Goswami, Hussain, Kumar et al. (2019), Jiménez-
Hernández et al. (2019), and Sultana and Rahman (2020), and Jelassi and Delhoumi (2021)
Page 2 of 26
have examined both bank-specific and macroeconomic factors that determine technically the
efficiency of banks. Bank-specific factors include those factors that are specific to banks or that
are controlled by their management policy and decisions (Djalilov & Piesse, 2016).
Macroeconomic factors, on the other hand, are the exogenous forces derived from the nation’s
economic environment and are not directly related to the internal banking policy (Ding et al.,
2017).
Consequently, different literature on bank efficiency shows that the level of efficiency varies
from country to country and the findings are inconsistent in terms of sign, size, and statistical
significance of the coefficients of explanatory variables. In Ethiopia, studies (Yasin, 2018; Amene &
Alemu, 2019; and Lemi et al., 2020) were conducted to investigate determinants of financial
performance using ratio analysis. However, it is difficult to get comprehensive figures indicating
the efficiencies of banks by only applying ratio analysis. Hence, this paper explores issues that
influence the technical efficiency of commercial banks in Ethiopia using DEA and Tobit models.
2.1. Bank specific factors
2.1.1. Branches of bank

Literature on the effect of the number of bank branch on the technical efficiency of banks is
limited. Bannour and Labidi (2013) found that the technical efficiency of commercial banks may
not increase with the broadening of their distribution networks. Furthermore, Hirtle (2007) and
Řepková (2015) found no significant effect on the number of branches. According to Liang et al.
(2013), they found a positive impact on the technical efficiency of banks. This is because as banks
get geographically closer to their clients, could enhance their number of clients, which in turn raise
their performance. Based on the aforementioned, the study proposes the following hypothesis.
H1: There is a direct relation between the number of branches and efficiency of banks.
2.1.2. Bank size

On the empirical front, the nexus between bank size and efficiency is an ongoing debate. Studies
such as Karray and Eddine Chichti (2013), Anwar (2019), Otero et al. (2020), and Sakouvogui and
Shaik (2020) establish that banks with higher assets record have higher efficiency in their opera
tion. However, studies show that there is an inverse relationship between bank size and cost-
efficiency literature (Ding & Sickles, 2018; Hadhek et al., 2018; R. M. Banya & Biekpe, 2017; Staněk,
2015). However, Ojeyinka and Akinlo (2021) found that larger banks do not enjoy any cost
advantage over their smaller counterparts, hence, refereeing to the findings, the study proposes
the following hypothesis.
H2: The efficiency of banks is directly related to the size of banks as measured by total asset
2.1.3. Credit risk

Credit risk was found to be ambiguous. R. Banya and Biekpe (2018), Adusei and McMillan (2016),
and Sharma et al. (2015) found that risk was positively related to technical efficiency. Whereas
Salim et al. (2017), Hamza (2017), and Munangi and Bongani (2020) found that there is an inverse
relationship between credit risk management and bank performance. Hence, the study predicts
the following hypothesis.
H3. Credit Risks are associated inversely with bank efficiency.
Page 3 of 26
2.1.4. Liquidity risk

Empirical studies show that the impact of liquidity risk on bank efficiency is mixed. Some studies
(Batir et al., 2017; Řepková, 2015; Tan et al., 2017) found that liquidity risk has a positive effect on
bank efficiency. Others found a negative effect (Dahiyat, 2016; Marozva, 2015). Furthermore,
R. Banya and Biekpe (2018) found that liquidity risk is insignificant to affect technical efficiency.
Referring to these findings, we propose the following hypothesis:
H4: Liquidity Risk is inversely associated with efficiency.
2.1.5. Level of capitalization

Capitalization was found to be positively related to technical efficiency by most of the studies (Řepková,
2015; Ayadi, 2014; Blankson et al., 2022), except Batir et al. (2017), Adusei and McMillan (2016), and
Adjei-Frimpong et al. (2014) who found a negative relationship between capitalization and technical
efficiency. Based on the literature, the study hypothesised the following statement.
H5; Level of Capitalization directly influences the efficiency level of banks.
2.1.6. Fixed asset

Fixed asset investment is crucial for conducting business operations and also improves an orga
nization’s ability to deliver goods and services. The literature on the impact of fixed assets on bank
efficiency is scanty. According to Olatunji and Adegbite (2014), fixed assets of banks significantly
and positively affect bank efficiency. In contrast, Marian and Ikpor (2017) found a negative impact
of fixed assets on the performance of banks. Hence, our study proposes the following statement.
H6: Fixed asset directly related to bank efficiency
2.2. Macroeconomic factors
2.2.1. GDP Growth

A country’s economic growth is traditionally measured by its Gross Domestic Product (GDP) and
can have a significant impact on the performance of banks. Studies by Defung et al. (2016),
Kamarudin (2015), and Trabelsi and Trad (2017) found that in time of favor of economic growth
the demand for credit by household and company will rise up which in turn increases the efficiency
of banks. However, Dell’Atti et al. (2015), Aiello and Bonanno (2016), and Goswami, Hussain, Kumar
et al. (2019) showed that in periods of significant economic growth, they inversely affect the
profitability of banks. This is due to the tendency to adjust their interest margins. Accordingly, we
propose the following hypothesis to be tested
H7: There is a significant positive relationship between the country’s GDP and the efficiency of banks
2.2.2. Inflation rate

Empirical literatures has found inconclusive features between the effect of inflation and the perfor
mance of the commercial bank. Most of the literature (Alhassan et al., 2016; Jelassi & Delhoumi, 2021;
Seelanatha, 2012) found that there is a positive impact of inflation on bank efficiency. However,
studies by Ofori-Sasu et al. (2019) and Karimu Tossa (2016) found a negative relation between inflation
and the technical efficiency of banks. Based on the mixed result, the following hypothesis is posed.
H8: Inflation rate inversely associated with bank efficiency
Page 4 of 26
3. Methodology
The study considered all 17 commercial banks in Ethiopia, which have audited financial statements
over the period 2014 to 2020.
3.1. Variables definition and measurements

In the efficiency literature, there is no single rule for selecting input and output variables (Berger &
Humphrey, 1997) and the variables are defined using the production approach, intermediation
approach, value-added approach, and operating approach. Banks are assumed to be intermediaries
between savers and borrowers in the intermediation approach, so the inputs are all types of funds and
the outputs are all types of lending products. The production approach is used to study the efficiency of
bank branches, while the intermediation approach is used for empirical studies at the bank or industry
level (Mohd Noor. et al., 2020).
This study used a variant of the intermediation approach based on Sealey and Lindley’s (1977)
widely accepted intermediation approach. Furthermore, several studies Mohd Noor. et al., (2020);
Mokhtar et al. (2008); Rahim et al. (2013); and Dharmendra and Bashir, 2015) used an intermediation
approach to assess bank efficiency. Following the works of previous literature (Karimu Tossa, 2016;
Ofori-Sasu et al., 2018; Tadesse 2017 and Lutfi and Suyatno 2019), this study used input variables such
as fixed asset, deposit, and interest expense. Total loan and advances, interest income, and non-
interest income as output variables as described in Table 1. Various studies considered labour as one of
the input output variables in estimating commercial banks’ technical efficiency. However, in this study,
we did not consider labour as an input variable in the estimation process because the contribution of
employee’s number (physical labour) in the production process is less significant than effective
(productive) labour. As explained by Marshall (1967), labour is the amount of physical, mental, and
social effort required in an economy to produce goods and services. It also provides the knowledge,
manpower, and services needed to convert raw materials into finished goods.
According to Jajri and Ismail (2010), effective labour differs from physical labour in that the
former is computed by taking into account labour quality in terms of educational qualification,
training received, or skill acquired. Furthermore, education and training have a significant impact
on labour quality. In theory, when effective labour (labour quality) is used, output growth is
Table 1. Description of input-output variables (DEA model)

Variables Description
Output Variables Total loan and advances Total loan and advance disbursed
for customers
Interest income Interest on loans and advances,
interest on deposits, and interest
on Treasury and NBE bills are all
added together.
Non-interest income Commissions, fees on letters of
credit, letters of guarantee, and
local transfers, as well as other
sources of revenue
Input Variables Fixed assets Total fixed asset
Deposits The sum of demand, time, and
saving deposit
Interest expense The sum of payment on fixed
deposits, saving and demand
deposits
Source: Based on the literature, 2021
Page 5 of 26
enhanced and occurs at a faster rate than labour force growth (number of labour). This higher
growth rate can be attributed to the productivity difference between physical labour and effective
labour.
Therefore, in order to capture the full effect of labour in our study, we have to collect the
disaggregated data about both the actual number of physical labour and effective labour.
However, such disaggregated data were difficult to obtain uniformly from each commercial bank
of Ethiopia for the study period. As a result, estimating bank efficiency mainly by the number of
employees without taking into account the quality of labour will result in a biased estimation.
Therefore, we are unable to include labour as an input variable in our efficiency model. However,
acknowledging the absence of labour as an input variable, we still hope to provide a useful
framework for analysing the technical efficiency of commercial banks in Ethiopia.
Table 2 also outlines the expected characteristics that influence the efficiency of Ethiopian
commercial banks. The following bank-specific and macroeconomic variables are utilized for
the second stage of the DEA model. The selection of the variables is supported by various
literatures (Zenebe Lema, 2017; Akmal & Saleem, 2008; Ayadi, 2014; Tesfay, 2016; Alrafadi et al.,
2014; Soetanto, 2011; Jelassi & Delhoumi, 2021; Hassan & Jreisat, 2016; and Soetanto, T. V.,2011;
Tecles & Tabak, 2010; Rosman et al., 2014; Řepková, 2015; Petria et al., 2015; Blankson et al., 2022;
Dinberu & Wang, 2018) and availability of data. As a result, the study considered the number of
branches, bank size, liquidity risk, capitalization level, log of fixed assets, credit risk, log of GDP, and
inflation as factors affecting the technical efficiency of Ethiopian banks.
3.2. Methods of analysis
3.2.1. Data envelopment analysis (DEA)

In this study, the DEA model was used to assess the technical efficiency of commercial banks. DEA
is a nonparametric linear programming technique that produces an efficiency frontier by
Table 2. Determinants of bank efficiency

Notation Variable Definition Expected Sign
Dependent variable
TE Technical Efficiency Efficiency scores of banks
computed by applying
VRS DEA method
Independent variables
NB Number of Branches Number +
LQ Liquidity Risk The ratio of Total Loans -
to Total Deposits
CR Credit risk loan to asset ratio +
SIZE Bank size The log of total Asset +
LC Level of Capitalization The ratio of equity divided +
by total assets
LogFA Fixed Asset The logarithm of fixed +
asset
Log GDP Log of GDP The logarithm of GDP +
INF Inflation Inflation rate measured -
by the consumer price
index approach
Source, Own Computation, 2021
Page 6 of 26
optimizing each provider’s weighted output/input ratio. It is a method for comparing a company’s
or its components’ performance by taking into account various inputs and outputs. By using
Charnes et al. (1978)’s proposed model, the efficiency score based on a constant return to scale
(CRS) is defined as follows:
∑ of bank outputs; weighted

Effeciency ¼ (1)
∑ of bank inputs; weighted
If there are n banks, each with m bank inputs and s bank outputs, the relative efficiency score of
one of them, P, can be obtained by solving the following model:
s
∑ Ur Yrp
Efficiency ¼ max r¼1
m
∑ Vi Xip
i¼1
s
∑ Ur Yrj
s:t : max r¼1
m
� 1; j ¼ 1; 2; . . . ; n
∑ Vi Xij
i¼1
Ur ; Vi >0; "r ; "i ; r ¼ 1; 2; . . . ; s; i ¼ 1; 2; . . . m (2)
Where:
Xij ¼ theamountofinputiutlizedbyjthbank
Yrj ¼ theamountofoutputrproducedbyjthbank
Ur ¼ weightgiventooutputr
Vi ¼ weightgiventoinputi
The functional programming model of equation (2) can be transformed to a linear programming
model by adding the following constraint.
m
∑ Vi Xip ¼ 1 thus, the relative efficiency score of bank P can be obtained by solving the following
i¼1
equation
s
Max Efficiecnyp ¼ Maxur vi ∑ Ur Yrp
r¼1
s m
S:t : ∑ Ur Yrj ∑ Vi Xij � 0; "i
r¼1 r¼1
m
∑ Vi Xip ¼ 1Ur ; Vi >0; "r ; "i (3)
i¼1
Page 7 of 26
The first constraint requires that all banks need to be on or below boundaries, while the second
stipulates that a bank’s weighted sum of inputs must equal one. The technical and scale efficiency
ratings are separated using the variable return to scale (VRS) methodology. Variable returns to
scale cover the data more closely than the CRS model. As a result, the relative efficiency score of
bank P can be calculated using the equation:
s
Max Efficiecnyp ¼ Maxur vi ∑ Ur Yrp þ U0
r¼1
s m
S:t : ∑ Ur Yrj ∑ Vi Xij þ U0 � 0; "i
r¼1 r¼1
m
∑ Vi Xip ¼ 1Ur ; Vi >0; "r ; "i (4)
i¼1
Where;
The return to scale is determined by the sign of the convexity constraint, U = 0. If U0 = 0, the
returns to scale are constant; if U0 > 0, the returns to scale are expanding; and if U0 = 0, the returns
to scale are increasing. The scale efficiency is derived as the ratio of the CRS and VRS models’
efficiency scores (Coelli et al., 2005).
3.2.2. Malmquist indices of total factor productivity

The Malmquist index is used to calculate the change in total factor productivity. To assess the TFP
change between two data points, the Malmquist Index evaluates the ratio of the distances
between each data point compared to a common technology. According to Fare et al. (1989), an
output-based Malmquist productivity change is defined as the geometric mean of two output-
based Malmquist indices, as illustrated in the following equation:
� t tþ1 tþ1 �1
Do ðx ; y Þ Dtþ1 o ðx
tþ1 tþ1 2
;y Þ
Mtþ1
o ðx
tþ1 tþ1 t t
;y ;x ;y Þ ¼ � (5)
Dto ðxt ; yt Þ Dtþ1 t t
o ðx ; y Þ
� �
Where M0 = measures production of the productivity point xtþ1 ; ytþ1 relative to xt ; yt ; D0 stands
for the distance from the frontier.
When M0 is greater than one, the total factor productivity grew from period t to period t + 1, and
when M0 is less than one, the total factor productivity fell. The index in Equation (5) is a mixture of
two indices. In one index, period t technology is employed, whereas in the other, period t + 1
technology is used.
3.2.3. Tobit regression model

The Tobit model was used to explore the elements that influence commercial bank efficiency. This
model was chosen because it is designed to estimate linear correlations between variables when
the dependent variable has either left- or right-censoring, and in our case the dependent variable
(DEA VRS) has a range of 0 to 1. Furthermore, the Tobit model converts the dependent variable’s
observed response into a latent variable (Wooldridge, 2015). Similar studies on efficiency determi
nants have been conducted in many parts of the world using the same methodology (Zenebe
Lema, 2017; Akmal & Saleem, 2008; Alrafadi et al., 2014; Soetanto, 2011).
Hence, the Tobit regression model is given by;
Yit� ¼ Xit� β þ 2it
Page 8 of 26
8
< L; if yit� < L
yit ¼ yit� ; if L< yit� < U (6)
:
U; ifyit� >U
Where yit is the observed dependent variable and Yit* is a vector of explanatory variables and are
the parameters to be estimated, L is the lower limit, U is the upper limit, I = 1,2, . . .,N represents
people, and t = 1,2, . . .,N represents time. The period is denoted by Tt, while the number of periods
is denoted by Tt. An empirical regression model is specified as;
TEit ¼ β0 þ β1 NBit þ β2 LQit þ β3 CRit þ β4 SIZEit þ β5 LCit þ β6 LogFAit þ β7 LGDPit þ β8 INFit þ εit (7)
4. Results
4.1. Descriptive statistics

The summary statistics of input-output variables are reported in Table 3. Banks had an average
total loan, interest income, and return on non-interest income of Birr 19.05 billion, 3.06 billion, and
833 million, respectively. In addition, banks in Ethiopia recorded a fixed asset, Deposit, and interest
expense of 1.13 billion, 36.27 billion, and 1.23 billion Birr, respectively.
4.2. DEA Results

Table 4 shows the efficiency ratings of the DEA result, which may be used to measure the banking
sector’s productivity performance from 2014 to 2020.
Table 3. Descriptive Statistics

Standard.
Variable Observations Mean Deviation Minimum Maximum
Output
variables
Total loan and 119 19,054.18 38,925.62 270.00 234,030.00
advances
Interest income 119 3,059.67 7,625.40 37.00 49,992.00
Total non- 119 833.01 1,386.17 40.00 8,626.00
interest income
Input Variables
Fixed assets 119 1,125.66 2,261.66 19.00 14,835.00
Deposits 119 36,274.39 94,212.49 500.00 591,107.00
Interest 119 1,229.09 3,101.63 12.00 21,340.00
expense
Source: Own computation, 2021
Table 4. Summary of Efficiency Scores

CRSTE VRSTE SCALE
Number of efficiency 7 14 7
Number of inefficiency 10 3 10
Maximum efficiency 100 100 100
Minimum efficiency 83 97 83
Average efficiency 96.5 99.6 96.9
Page 9 of 26
Table 4 shows that under VRSTE assumptions, three are inefficient and 10 under CRSTE assump
tions. In addition, 10 banks are SCALE inefficient. In contrast, under VRSTE, 14 efficient Banks, and
under both CRSTE and SCALE efficiency assumptions, 7 banks are efficient. In the CRSTE, VRSTE,
and SCALE models, the average efficiency score for banks from 2014 to 2020 is 96.5%, 99.6%, and
96.9%, respectively. This demonstrates that banks have the ability to increase the average tech
nical efficiency by 3.5%, 0.4%, and 3.1% in each model, respectively.
4.3. Annual efficiency score of banks

The annual efficiency score for the year 2014 to 2020 is presented in Table 5 and Table 6. The result in
Table 5 indicates that, for the year 2014, 8 (47%) banks registered efficiency scores of 100% and 9
(53%) are technically inefficient with a score below 100% in CRSTE. On the other hand, 11 (65%)
banks were at their highest efficiency score (100%) in variable return to scale assumption and 6(35%)
are inefficient. In addition, 7 (41%) banks are scale efficient and 10 (59%) banks are scale inefficient.
In terms of bank return to scale, 6 (35%) were experiencing decreasing returns to scale, 2 (18%) were
seeing increasing returns to scale, and 9 (47%) were at their optimal level of constant return to scale.
Bank’s technical and scale efficiency for the years 2015 and 2016 revealed that 5 (29%) banks scored
a CRS of 100%, whereas in the year 2016 there were 4 (24%) banks that registered an efficiency score
of 100%. On the other hand, 12 (71%) and 13 (76%) banks become technically inefficient for the period
2015 and 2016, respectively. Furthermore, 12 (71%) of banks had a VRS technical efficiency score of
100%, whereas 5 (19%) of banks were inefficient (below 100%) in the periods. Moreover, 5 banks (29%)
and 4 banks (24%) were scale efficient, while 12 (71%) and 13 (76%) banks registered scale efficiency
score of below 100% for the years 2015 and 2016, respectively. In terms of returns to scale, 6 (35%)
and 2 (12%) banks showed a rising return to scale over the course of the respective periods. However, 6
(35%) and 11 (65%) banks, respectively, showed falling returns to scale in the two decades.
Furthermore, 5 (19%) and 4 (24%) banks operated at optimal CRS. Similarly, the result in Table 6
indicates that for the period 2017 and 2018, 8 (47%) banks scored CRS of 100% in both periods. On the
other hand, 9(53%) of banks registered CRS technical efficiency scores of below 100% for both periods.
Further, 12 (71%) banks and 11 (65%) banks were registered efficient, whereas 5(19%) and 4(24%)
banks are inefficient for respective periods. Furthermore, 8 banks (47%) and 9(53%) banks were scale
efficient, while the remaining 9(53%) and 8(47%) banks registered scale efficiency scores lower than
100% for the years 2017 and 2018, respectively. Three (18%) of banks and two (12%) of banks
exhibited an increasing return. Nonetheless, 6(35%) banks exhibited decreasing returns to scale in
both periods, while 4 (24%) of banks exhibited constant returns to scale were they operate at their
optimal level.
Moreover, Table 6 show that for the period 2019 and 2020, 7(41%) and 9(53%) banks registered
a CRSTE score of 100%, while 10(59%) and 8(47%) banks become technically inefficient for the CRS
model for the respective period. On the other hand, 12(71%) and 13(76%) banks scored a variable
return to scale of 100%, whereas 5(19%) and 4(24%) banks scored less than 100% for the
respective periods. Moreover, 7 banks (41%) and 9 (53%) banks registered scale efficiency score
100%; however, 10(59%) banks and 8(47%) of banks are scale inefficient. Concerning return to
scale of banks, only Addis International Bank exhibited increasing return to scale for the year 2019,
while 9(53%) and 8(47%) banks showed decreasing returns to scale and the remaining 7(41%) and
9(53%) banks exhibited constant return to scale for respective periods.
4.4. Technical efficiency of banks based on ownership

The results in Table 7 indicate that in a VRSTE model, the state bank (commercial bank of Ethiopia)
is efficient through periods as compared to private banks. Similarly, it is efficient for the first two
periods in CRSTE. However, for the rest periods, domestic banks’ efficiency scores become
enhanced and showed better scores than state-owned banks, particularly in CRSTE and Scale
efficiency assumptions.
Page 10 of 26
Table 5. Banks’ Technical and Scale Efficiency for 2014–2016
2014 2015 2016
Banks CRSTE VRSTE scale RTS CRSTE VRSTE scale RTS CRSTE VRSTE scale RTS
Commercial Bank of 1 1 1 crs 1 1 1 crs 0.928 1 0.928 drs
Ethiopia
Awash International 0.914 1 0.914 drs 0.828 1 0.828 drs 0.937 1 0.937 drs
Bank
Dashen Bank 0.814 1 0.814 drs 0.755 1 0.755 drs 0.786 1 0.786 drs
Bank of Abyssinia 0.959 1 0.959 drs 0.806 0.84 0.96 drs 0.831 0.881 0.943 drs
Wegagen Bank 0.936 1 0.936 drs 0.908 0.959 0.947 drs 0.957 1 0.957 drs
United Bank 0.91 1 0.91 drs 0.843 0.907 0.93 drs 0.969 1 0.969 drs
Nib International Bank 1 1 1 crs 0.954 1 0.954 drs 0.946 1 0.946 drs
Cooperative Bank of 1 1 1 crs 1 1 1 crs 1 1 1 crs
Oromia
Lion International 0.947 0.952 0.995 drs 1 1 1 crs 0.975 1 0.975 drs
Bank
Oromia International 0.834 0.836 0.999 irs 0.733 0.755 0.97 irs 0.898 0.902 0.996 drs
Bank
Berhan International 1 1 1 crs 0.985 1 0.985 irs 1 1 1 crs
Bank
Bunna International 1 1 1 crs 0.947 1 0.948 irs 0.99 0.993 0.997 irs
Bank S.c
Zemen Bank Sc 0.971 0.971 0.999 crs 1 1 1 crs 0.946 1 0.946 drs
Abay Bank Sc 0.862 0.899 0.959 irs 0.826 0.861 0.959 irs 0.902 0.917 0.984 drs
Addis International 1 1 1 crs 1 1 1 crs 1 1 1 crs
Bank Sc
Debub Global Bank S.c. 0.94 1 0.94 irs 0.938 1 0.938 irs 1 1 1 crs
Enat Bank S.c. 1 1 1 crs 0.845 1 0.845 irs 0.953 0.956 0.996 irs
Mean 0.946 0.98 0.966 0.904 0.96 0.942 0.942 0.979 0.962
(Continued)
Page 11 of 26
Table 5. (Continued)
2014 2015 2016
Banks CRSTE VRSTE scale RTS CRSTE VRSTE scale RTS CRSTE VRSTE scale RTS
Sd 0.062 0.046 0.051 0.093 0.074 0.07 0.060 0.04 0.052
Min 0.814 0.836 0.814 0.733 0.755 0.755 0.786 0.881 0.786
Max 1 1 1 1 1 1 1 1 1
Page 12 of 26
Table 6. Banks’ Technical and Scale Efficiency for 2017–2020
2017 2018 2019 2020
Banks crste vrste scale RTS crste vrste scale RTS crste vrste scale RTS crste vrste scale RTS
Commercial Bank of 0.873 1 0.873 drs 0.899 1 0.899 drs 0.933 1 0.933 drs 0.84 1 0.84 drs
Ethiopia
Awash International 1 1 1 crs 1 1 1 crs 1 1 1 crs 1 1 1 crs
Bank
Dashen Bank 0.907 1 0.907 drs 0.882 1 0.882 drs 0.921 0.932 0.988 drs 0.93 0.968 0.961 drs
Bank of Abyssinia 0.937 0.942 0.995 drs 1 1 1 crs 0.941 1 0.941 drs 0.956 0.958 0.998 drs
Wegagen Bank 1 1 1 crs 1 1 1 crs 0.893 0.969 0.921 drs 0.93 1 0.93 drs
United Bank 1 1 1 crs 0.936 0.962 0.972 drs 0.951 0.999 0.952 drs 0.983 1 0.983 drs
Nib International Bank 0.993 1 0.993 drs 0.911 0.912 0.999 irs 0.895 0.946 0.946 drs 0.939 0.961 0.977 drs
Cooperative Bank of 1 1 1 crs 1 1 1 crs 1 1 1 crs 1 1 1 crs
Oromia
Lion International 1 1 1 crs 1 1 1 crs 1 1 1 crs 0.896 0.941 0.952 drs
Bank
Oromia International 0.9 0.945 0.953 drs 1 1 1 crs 1 1 1 crs 1 1 1 crs
Bank
Berhan International 1 1 1 crs 0.998 1 0.998 drs 0.984 1 0.984 drs 1 1 1 crs
Bank
Bunna International 0.995 0.997 0.998 irs 1 1 1 crs 1 1 1 crs 1 1 1 crs
Bank S.c
Zemen Bank Sc 0.852 1 0.852 drs 0.694 0.731 0.95 drs 0.864 0.873 0.989 drs 0.953 1 0.953 drs
Abay Bank Sc 0.879 0.886 0.992 irs 0.905 0.999 0.906 drs 0.895 1 0.895 drs 1 1 1 crs
Addis International 1 1 1 crs 0.961 0.966 0.995 irs 0.94 1 0.94 irs 1 1 1 crs
Bank Sc
Debub Global Bank S.c. 1 1 1 crs 1 1 1 crs 1 1 1 crs 1 1 1 crs
Enat Bank S.c. 0.947 0.963 0.983 irs 0.962 0.962 1 crs 1 1 1 crs 1 1 1 crs
Mean 0.958 0.984 0.973 0.950 0.972 0.977 0.954 0.983 0.97 0.966 0.99 0.976
(Continued)
Page 13 of 26
Table 6. (Continued)
2017 2018 2019 2020
Banks crste vrste scale RTS crste vrste scale RTS crste vrste scale RTS crste vrste scale RTS
Sd 0.055 0.032 0.048 0.079 0.067 0.041 0.048 0.035 0.035 0.047 0.019 0.042
Min 0.852 0.886 0.852 0.694 0.731 0.882 0.864 0.873 0.895 0.84 0.941 0.84
Max 1 1 1 1 1 1 1 1 1 1 1 1
Page 14 of 26
Table 7. Technical Efficiency (Mean)—Based on Ownership

Private (Domestic)Banks
2014 2015 2016 2017 2018 2019 2020 Average

CRSTE 0.943 0.898 0.943 0.963 0.953 0.955 0.974 0.947
VRSTE 0.979 0.958 0.978 0.983 0.971 0.982 0.989 0.977
SCALE 0.964 0.939 0.965 0.980 0.981 0.972 0.985 0.969
State-owned bank
CRSTE 1 1 0.928 0.928 0.928 0.933 0.84 0.937
VRSTE 1 1 1 1 1 1 1 1.000
SCALE 1 1 0.928 0.928 0.928 0.933 0.84 0.937
4.5. Peer and Peer weights

Table 8 shows the peer and peer weights for banks generated from the VRS efficiency model for
the recommended model. Inefficient banks might improve their performance by adopting the
policies and organizational structure of their peers.
The result indicated that the peer group for Bank 4 (Bank of Abyssinia) is the bank (2, 5, 6, & 12)
which entails that to become efficient, bank of Abyssinia should use an input–output combination
of banks (Bunna International Bank, Wegagen Bank, Awash International Bank, and United Bank).
The levels of the combination of the four banks are determined by peer weight.
4.6. Input and output slacks

Table 9 provides a summary of input and output slack movement (adjustment) for inefficient banks
to become efficient. The results indicated that on average, the output side of inefficiency could be
increased by Birr 76 million and Birr 25 million for total loan and interest income, respectively,
without changing the current input level.
Furthermore, if inefficient banks could lower fixed assets by Birr 37 million in order to become
more efficient while maintaining current output levels (See, Table 9 in the appendix).
4.7. Total factor productivity (TFP)

Table 10 presents a summary for Malmquist index of annual geometric means. It is shown that, on
average, TFP increased to some extent by 1% over the period 2014–2020. This improvement in
productivity of banks is mainly enhancement in technological changes (6%), where banks expand
the use of ICT for different service provisions. In addition, banks also improved internal efficiency
by 4%. Furthermore, the total productivity improvement is also contributed by 2% for both
changes on pure and scale efficiencies.
Moreover, Table 11 provides a summary of TFP growth of banks’ means. Accordingly, Abay Bank
attains premier growth (6.2%) followed by Dashen Bank (6%) and United Bank (5.9%). All of this
expansion is the result of technical advancements of banks by 3.6%, 3.7%, and 4.5%, respectively.
While Commercial and Cooperative banks have shown the highest deterioration total factor
productivity by (7.2%) and (7.8%), respectively (See, Table 11 in the appendix).
4.8. Factors affecting commercial banks of Ethiopia
4.8.1. Descriptive statistics of variables in the Tobit model

Table 12 presents the summary statistics of variables in the Tobit model. As it is shown, the banks
under study recorded an average number of branches of 243. The number of branches varies from
Page 15 of 26
Table 8. Peers and Peer Weight
DMUs(Banks) peers: peer weights:

1 1 1
2 2 1
3 3 1
4 2 5 6 12 0.238 0.417 0.302 0.044
5 5 1
6 6 1
7 2 6 5 0.018 0.404 0.578
8 8 1
9 9 1
10 12 8 2 0.497 0.431 0.072
11 11 1
12 12 1
13 13 1
14 14 1
15 15 1
16 16 1
17 17 1
Page 16 of 26
Table 9. Input and output slacks
Output slacks Input slacks

Banks Total loan Interest Interest Fixed assets Deposit Interest
income income expense
1 0 0 0 0 0 0
2 0 0 0 0 0 0
3 0 0 0 0 0 0
4 0 0 188.434 415.551 0 0
5 0 0 0 0 0 0
6 0 0 0 0 0 0
7 160.076 0 227.183 168.428 0 0
8 0 0 0 0 0 0
9 0 0 0 0 0 0
10 1137.231 0 15.294 58.813 0 0
11 0 0 0 0 0 0
12 0 0 0 0 0 0
13 0 0 0 0 0 0
14 0 0 0 0 0 0
15 0 0 0 0 0 0
16 0 0 0 0 0 0
17 0 0 0 0 0 0
Mean 76.312 0 25.348 37.811

Table 10. TFP Growth
Year Eff TE PE SE TFP

2015 0.952 1.068 0.978 0.974 1.017
2016 1.046 0.991 1.022 1.023 1.036
2017 1.017 0.929 1.005 1.012 0.945
2018 0.99 1.027 0.986 1.004 1.017
2019 1.007 1.028 1.013 0.994 1.035
2020 1.013 0.999 1.007 1.006 1.012
Mean 1.004 1.006 1.002 1.002 1.01

Note that the abbreviations Eff, TEch, PE, SE, and TFP stood for efficiency change, technological efficiency change, pure
efficiency change, scale efficiency change, and total factor productivity change, respectively.
4 to 1825 over the period. The average liquidity risk of the commercial banks in Ethiopia under
study is determined to be 0.498 with the minimum and maximum liquidity risk of 0.29 and 0.65,
respectively. The average credit risk of the commercial banks in Ethiopia under study is determined
Page 17 of 26
Table 11. TFP Growth in the Banking Sector, 2014–2020
Banks Eff TE PE SE TFP

Commercial 0.971 0.956 1 0.971 0.928
Bank of Ethiopia
Awash 1.015 1.018 1 1.015 1.033

International
Bank
Dashen Bank 1.022 1.037 0.995 1.028 1.06
Bank of 0.999 1.048 0.993 1.007 1.048

Abyssinia
Wegagen Bank 0.999 1.044 1 0.999 1.043
United Bank 1.013 1.045 1 1.013 1.059
Nib 0.99 1.06 0.993 0.996 1.049

International
Bank
Cooperative 1 0.922 1 1 0.922

Bank of Oromia
Lion 0.991 1.001 0.998 0.993 0.992

International
Bank
Oromia 1.031 0.95 1.03 1 0.979

International
Bank
Berhan 1 0.983 1 1 0.983

International
Bank
Bunna 1 1.028 1 1 1.028

International
Bank S.c
Zemen Bank Sc 0.997 0.996 1.005 0.992 0.993
Abay Bank Sc 1.025 1.036 1.018 1.007 1.062
Addis 1 1.011 1 1 1.011

International
Bank Sc
Debub Global 1.01 0.98 1 1.01 0.99

Bank S.c.
Enat Bank S.c. 1 1.003 1 1 1.003
Mean 1.004 1.006 1.002 1.002 1.01

Source: Own computation,2021
to be 0.65 with the minimum and maximum liquidity risk of 0.39 and 0.91, respectively. Bank size
as measured by the logarithm of total assets is found to have a mean value of 23.38 over the
period under study. The summary statistics also indicate that the mean value of the logarithm of
a fixed asset is 19.70 with the minimum and maximum values of 16.76 and 23.13, respectively.
4.8.2. The Tobit model result

Initially, the study selected 10 explanatory variables, which cover bank-specific variables (number of
branches, number of employees, ownership, market share, liquidity risk, Credit Risk, Bank Size, Level of
Capitalization, and Log of Fixed Asset) and macroeconomic variables (Log of Gross Domestic Product
Page 18 of 26
Table 12. Descriptive statistics of variables in the Tobit model
Variable Obs Mean Std. Dev. Min Max

Variables return 119 0.9784958 0.0478753 0.731 1
to scale (VRTS)
Number of 116 243.931 299.3417 4 1825

branch (NB)
Liquidity Risk 117 0.4982842 0.0772712 0.2963485 0.6547294

(LIQ)
Credit Risk (CR) 117 0.6529392 0.0938615 0.3972224 0.9145538
Bank Size (lSIZE) 117 23.38352 1.302328 19.86681 27.29258
Level of 115 0.1442424 0.0424791 0.037171 0.2595156

capitalization
(LC)
Log of Fixed 118 19.70629 1.459709 16.762 23.13988

Asset (logFA)
Log of GDP 119 25.09109 0.210051 24.74167 25.40211

(logGDP)
Inflation (INF) 119 11.96714 4.650997 6.63 20.35

and Inflation) for the second-stage Tobit model. However, the number of employees, ownership, and
market share are excluded from the model due to the perfect Multicollinearity problem (See
Appendix A). Hence, the estimated technical efficiency scores are regressed against the remaining
eight variables, as described in Table 13. In addition, we run the Breusch–Pagan test to detect the
presence of heteroscedasticity and the result indicates the presence of heteroscedasticity (see
Appendix B). As a result, the least-squares estimator is still a linear and unbiased estimator, but it
is no longer best. That is, there is another estimator with a smaller variance. In addition, the standard
errors computed for the least-squares estimators are incorrect. This can affect confidence intervals
and hypothesis testing that use those standard errors, which could lead to misleading conclusions.
Therefore, this study applied heteroskedasticity-consistent standard errors or simply robust standard
errors to solve the affirmation problems (Gelfand, 2015).
The findings of Jathurika (2018), who examined the statistically significant and positive impact
of the number of branches on the technical efficiency of commercial banks operating in Sri Lanka,
are consistent with the results reported in Table 14. The results show that the coefficient of the
number of branches (NB) is positive and statistically significant at 5%, indicating that banks with
a large number of branches are more efficient than banks with a small number of branches. Thus,
the technical efficiency of commercial banks operating in Ethiopia will increase by being more
physically close to their clients by opening a lot of branches. To maintain a level at which an overall
increase in technical efficiency is feasible, bank managers may want to re-evaluate their strategy
for branch expansion. Similar studies on determinants of efficiency are also used in this method,
including (Zenebe Lema, 2017; Akmal & Saleem, 2008; Alrafadi et al., 2014; Soetanto, 2011). The
result indicated that the number of bank branches is positively and statistically significant in
affecting bank efficiency. The outcome, however, contradicts Jelassi and Delhoumi’s (2021) find
ings, which revealed a maximum average efficiency loss of 0.2% for each extra bank branch in
Tunisia, and with the findings of Zenebe Lema (2017) that found the number of banks branches
decreases the banks’ technical efficiency.
Page 19 of 26
Table 13. Robust Tobit regression result
Robust
variables Coef. Std. Err. t P>t [95% Conf. Interval]
NB .0003929** .0002265 1.74 0.086 −.0000561 .000842
LIQ −1.765412** .6601163 −2.67 0.009 −3.074301 −.4565238
CR .9339213** .4890471 1.91 0.059 −.0357686 1.903611
SIZE .1791463* .0400813 4.47 0.000 .0996725 .2586201
LC .9928821 .8155408 1.22 0.226 −.6241847 2.609949
logFA −.1093701* .0245961 −4.45 0.000 −.1581397 −.0606005
logGDP .0958169 .1397498 0.69 0.494 −.1812812 .372915
INF −.0049354 .0051613 −0.96 0.341 −.0151694 .0052986
_cons −3.244561 3.540252 −0.92 0.362 −10.26423 3.775104
/Sigma .0920702 0.0139934 .06 43,238 .11 98,166
0 left-censored observations
34 uncensored observations
79 right-censored observations at VRTS ≥1

Level of significance: *(1%), **(5%),
The most dangerous risk to the bank is typically liquidity risk. It compromises not just the security of
each commercial bank, but also that of the entire banking system (Eichberger & Summer, 2005).
According to Table 14, the level of technical efficiency was significantly and negatively affected by the
banks’ level of liquidity risk, which is against the findings of Zenebe Lema (2017). The outcome is
consistent with those of Lee & Kim (2013) and Bassey and Moses (2015), who find that liquidity risk and
bank performance are negatively correlated in Asia and Africa, respectively.
The success of a bank’s operations depends more than any other risk on the correct measure
ment and effective management of credit risk, which is by far the biggest threat to banks
(Gieseche, 2004). Table 14 shows the statistically significant and favorable effect of credit risk on
the technical effectiveness of Ethiopian commercial banks as assessed by loan-to-asset ratio. The
outcome supports those of R. Banya and Biekpe (2018), Adusei and McMillan (2016), and Sharma
et al. (2015) who discovered a statistically significant positive relationship between credit risk and
technical efficiency.
Bank size, as defined by the logarithm of total assets, has a positive and statistically significant
impact on the technical efficiency of commercial banks in Ethiopia, according to our estimates.
These findings are in line with the findings of Hassan and Jreisat (2016), Soetanto (2011), and
Karray and Eddine Chichti (2013) Anwar (2019), Otero et al. (2020), and Sakouvogui and Shaik
(2020). However, this contradicts the findings of Staněk (2015), R. M. Banya and Biekpe (2017), Ding
and Sickles (2018), and Hadhek et al. (2018).
The technical efficiency of Ethiopian commercial banks is negatively and statistically significantly
impacted by the fixed asset logarithm, as shown in Table 14. According to Onyiriuba (2016), asset
acquisition should be the major an indicator of the owner’s stake in the business is consistent with
the outcome. However, the result contradicts the finding of Olatunji and Adegbite (2014) who
found a strong and positive statistical impact of fixed assets on the efficiency of banks.
Page 20 of 26
On the other hand, the level of capitalization is found to be statistically insignificant and has
a positive impact on the level of technical efficiency. This result confirms the conclusion of Tecles
and Tabak (2010), Rosman et al. (2014), Zenebe Lema (2017), and Řepková (2015). Furthermore,
the two macroeconomic variables (log of GDP and inflation) were found to have a statistically
insignificant impact on the technical efficiency of Ethiopian commercial banks. The finding is in line
with Knezevic and Dobromirov (2016) who found no relationship between economic growth and
bank efficiency.
5. Conclusion
This paper explores factors affecting the technical efficiency of commercial banks in Ethiopia.
According to the DEA analysis, seven banks are technically efficient based on CRS assumptions.
This implies that about 58.8% of the banks are technically inefficient. Furthermore, 14 banks are
technically efficient in accordance with the VRS assumption. In other words, 17.6% of the banks
are technically inefficient. The result shows that there is potential for improving the technical
efficiency without requiring additional resources. That is, when inefficient banks enhance their
performance on average by 3.5% and 0.4% on CRS and VRS assumptions, they can become
efficient without the requirement of additional resources. On the other hand, the Malmquist DEA
analysis shows that the average productivity of schools improved in the last seven years of
operation by 1%. The improvement in productivity of banks is mainly due to technological changes
and internal efficiency.
According to the Tobit regression results, out of the bank-specific variables, number of branches,
credit risk, and bank size influence the technical efficiency of banks positively. However, fixed
assets and liquidity risks are inversely related to banks. Furthermore, the level of capitalization is
statistically insignificant to affect efficiency. Based on macroeconomic explanatory variables, both
inflation rate and GDP are not significant to impact the technical efficiency of banks.
As a result, to enhance the overall efficiency of commercial banks of Ethiopia, they have to
consider enhancing their branches in the different regions of the country. In other words, banks
should raise their accessibility for customers. Moreover, banks should improve both bank size and
credit risk to enhance efficiency. However, they have to reduce the liquidity risk and investment on
fixed assets for improving their efficiency.
Further studies should focus on measuring the efficiency of commercial banks in Ethiopia by
applying a more deterministic frontier technique, Stochastic Frontier Analysis (SFA). Besides, other
efficiency estimations such as cost efficiency, super efficiency, and cross-efficiency model would
be employed in the future research. One limitation of using the Tobit regression model was that
the scores are not observable and unable to get a guaranteed statistical inference of the analysis.
Hence, future research will employee a bootstrapped–truncated regression model in the second
stage as recommended by Simar and Wilson (2007). Moreover, the study is unable to take into
account labour as input variable in the first stage of efficiency estimation and explanatory vari
ables, such as market concentration ratio, exchange rate, salary expense, and year of operation
that could determine the efficiency of banks in the second stage of efficiency estimation.
1
Funding Department of Economics, College of Business &
The authors received no direct funding for this research. Economics, Haramaya University, Dire Dawa, Ethiopia.
2
Department of Accounting and Finance, College of
Author details Business & Economics, Haramaya University, Dire Dawa,
Salah Mohammed Abdulahi1 Ethiopia.
E-mail: [email protected]
ORCID ID: http://orcid.org/0000-0001-8818-4788 Disclosure statement
Mekonnen Kumlachew Yitayaw2 No potential conflict of interest was reported by the
ORCID ID: http://orcid.org/0000-0001-6076-1774 author(s).
Habtamu Legese Feyisa1
ORCID ID: http://orcid.org/0000-0002-4345-2432 Citation information
Wondmagegn Biru Mamo2 Cite this article as: Factor affecting technical efficiency of
ORCID ID: http://orcid.org/0000-0002-8516-659X the banking sector: Evidence from Ethiopia, Salah
Page 21 of 26
Mohammed Abdulahi, Mekonnen Kumlachew Yitayaw, Operational Research, 98(2), 175–212. doi.00342-6.
Habtamu Legese Feyisa & Wondmagegn Biru Mamo, https://doi.org/10.1016/S0377-2217(96)
Cogent Economics & Finance (2023), 11: 2186039. Blankson, N., Anarfo, E. B., Amewu, G., & Doabil, L. (2022).
Examining the determinants of bank efficiency in
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Appendix
Appendix A. Multicollinearity test result
Multicollinearity problem without MS, own, &

Multicollinearity problem with MS, own, & NE NE
Variable VIF 1/VIF Variable VIF 1/VIF

MS 80.36 0.012445 logTA 14.36 0.069622
own 76.06 0.013148 LIQ 12.52 0.079876
NE 40.88 0.024459 CR 8.76 0.114193
NB 32.73 0.030550 logFA 6.43 0.155579
logTA 16.41 0.060950 LC 6.23 0.160427
LIQ 15.52 0.064416 NB 6.06 0.165087
CR 9.30 0.107528 logGDP 4.96 0.201802
logFA 7.95 0.125802 INF 4.34 0.230639
LC 6.26 0.159680
logGDP 5.35 0.186866
INF 4.67 0.213932
Mean VIF 26.86 Mean VIF 7.96
Appendix B. Breusch–Pagan/Cook–Weisberg test for heteroscedasticity
Breusch–Pagan/Cook–Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of VRTS
chi2(1) = 49.63
Prob > chi2 = 0.0000
Page 25 of 26
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Factor affecting technical efficiency of the banking

Salah Mohammed Abdulahi, Mekonnen Kumlachew Yitayaw, Habtamu

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FINANCIAL ECONOMICS | RESEARCH ARTICLE

Subjects: Public Finance; Corporate Finance; Banking

JEL Classification: G21; G24; G32

ABOUT THE AUTHOR PUBLIC INTEREST STATEMENT

2.1. Bank specific factors

2.1.1. Branches of bank

2.1.2. Bank size

2.1.3. Credit risk

H3. Credit Risks are associated inversely with bank efficiency.

2.1.4. Liquidity risk

H4: Liquidity Risk is inversely associated with efficiency.

2.1.5. Level of capitalization

H5; Level of Capitalization directly influences the efficiency level of banks.

2.1.6. Fixed asset

H6: Fixed asset directly related to bank efficiency

2.2. Macroeconomic factors

2.2.1. GDP Growth

2.2.2. Inflation rate

H8: Inflation rate inversely associated with bank efficiency

3.1. Variables definition and measurements

Table 1. Description of input-output variables (DEA model)

3.2. Methods of analysis

3.2.1. Data envelopment analysis (DEA)

Table 2. Determinants of bank efficiency

∑ of bank outputs; weighted

Ur ; Vi >0; "r ; "i ; r ¼ 1; 2; . . . ; s; i ¼ 1; 2; . . . m (2)

3.2.2. Malmquist indices of total factor productivity

3.2.3. Tobit regression model

Hence, the Tobit regression model is given by;

Yit� ¼ Xit� β þ 2it

4.1. Descriptive statistics

4.2. DEA Results

Table 3. Descriptive Statistics

Table 4. Summary of Efficiency Scores

4.3. Annual efficiency score of banks

4.4. Technical efficiency of banks based on ownership

Table 7. Technical Efficiency (Mean)—Based on Ownership

2014 2015 2016 2017 2018 2019 2020 Average

4.5. Peer and Peer weights

4.6. Input and output slacks

4.7. Total factor productivity (TFP)

4.8. Factors affecting commercial banks of Ethiopia

4.8.1. Descriptive statistics of variables in the Tobit model

DMUs(Banks) peers: peer weights:

4 2 5 6 12 0.238 0.417 0.302 0.044

7 2 6 5 0.018 0.404 0.578