Efficiency of Private Commercial Banks in Ethiopia: A Data Envelopment Analysis Approach

Abstract

Efficiency is the most important thing that any firm in business aspires to achieve. The aim of
being an efficient firm is to achieve greater outputs with the available inputs. This has
continued to be a concern for many banks. This study aims to assess the relative technical
efficiency and scale efficiency in 16 Ethiopian private commercial banks during the year
2013/14 by utilizing the single stage Data Envelopment Analysis model. The data are collected
from the Annual reports and websites of individual private banks, National Bank of Ethiopia
quarter and annual reports, and publications. The findings reveal that 50% of the private banks
in operation are technically inefficient in Constant Returns to Scale model. In terms of scale
efficiency 44%, private banks are scale inefficient. The result also revealed that the major form
of scale inefficiency is Increasing Returns to Scale. NIB bank is found to be the most efficient
as compared to other private commercial banks in Ethiopia. The study used input oriented
intermediation approach to analyze the input and output variables. The input variables used
are total deposits, branch number, staff size, and capital employed and the output variables
included Profit and Loan. The study concluded that the source of inefficiency of Ethiopian
private commercial banks is poor input-output mix and selecting appropriate scale size. But
there is ample scope for improvement in efficiency.