Technical efficiency and total factor productivity of rural banks in Ghana

Abstract

This study sought to estimate the level of technical efficiency and total factor productivity of RCBs in Ghana using Stochastic Frontier Analysis (SFA). The total factor productivity (TFP) was decomposed into efficiency change and technical change over the study period. Quarterly data spanning 2009 to 2012 was sourced from the ARB-Apex Bank for a sample of 107 out of 137 RCBs in Ghana. The findings suggested that RCBs have room to improve on their technical efficiency and total factor productivity levels. Technical efficiency change, on average, was the main source of total factor productivity change during the period. The results suggest the shifting of the RCBs production frontier causing improvement in the TFP. The finding implies that efforts to improve efficiency and productivity of RCBs must be focused on improving the operational environment through rigorous efficiency analysis and monitoring by the regulator and management boards. The findings on the relative efficiencies also have implications for investment decision by prospective investors.

Keywords:

• rural and community banks
• productivity
• technical efficiency
• stochastic frontier analysis (SFA)
• Ghana

JEL classifications:

• G20
• G21
• G28

Public Interest Statement

An efficient financial institution serves as confidence booster for both investors (shareholders) and customers in the financial sector. Specific knowledge on the level of efficiency and productivity pertaining in the Rural Banks in Ghana is of interest to the regulator and the public that invests and saves with them. Recent cases of collapse of the microfinance institutions in Ghana make it more imperative to study the efficiency and productivity of these Banks and provide empirical evidence needed to deepen prudential requirements, supervision, and regulation. This will improve the operational efficiency and competitiveness of these financial institutions and attract investors into the sector in Ghana.

Notes

1. See Greene (2005b) for more on the choice of functional form of the production function.

2. See Table A1 in the appendix for specifications of the selected models.

3. The results of the two models (CD and TL) were found not to be significantly different.

4. Note however that at some point within the study period, the RCBs achieved full technical efficiency. See maximum values of efficiency scores for each individual RCB in Figure 1.

Additional information

Notes on contributors

Eric Fosu Oteng-Abayie

Eric Fosu Oteng-Abayie has a PhD in Economics and is currently a senior lecturer in the Department of Economics at Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. He has experience in management and research consultant. He has published articles in the area of financial economics, macroeconomics, and research methodology. Eric’s current research focuses on economics of energy, health, and development issues. As a lecturer, he teaches Mathematical Economics, Advanced Macroeconomics, Labour Economics, and Research Methodology.