Measuring and explaining the efficiencies of the United Arab Emirates banking system

Abstract

Using newly collected data from a survey distributed to all banks in the United Arab Emirates (UAE), this article measures economic efficiency in the banking industry, namely allocative, technical, pure technical and scale efficiency. Employing a nonparametric Data Envelopment Analysis (DEA) approach, the study estimates the efficiency for a cross section of the UAE banks in 2004. The results indicate that the dominant source of inefficiency in the UAE banking is stemming from allocative inefficiency rather than technical inefficiency. Furthermore, the main source of the relatively small size, technical inefficiency in the UAE banking industry is not the scale inefficiency but rather pure technical inefficiency. The results further indicate that the UAE banks are able to use their input resources more efficiently when they have more branches, and that newer banks are performing better than older banks on average. Moreover, the results also show that short experiences of employees affect efficiencies negatively and government ownership tends to reduce efficiency (as the government shares increase in the bank, the efficiency scores get lower). Finally, the most interesting results have to do with finding higher average efficiencies in banks that employ more women, more managers and less national citizens of the UAE.

Acknowledgements

The authors would like to thank a reviewer for his/her helpful comments and would like to acknowledge with gratitude the financial support provided by the UAE University (interdisciplinary research grant # 01-4-12/02).

Notes

¹ For more details on the issue of measuring bank efficiency, using the nonparametric DEA approach and its comparability across different countries, regions of the world and under various operational and environmental working conditions, the interested reader is referred to Drake (2001), Devaney and Weber (2002), Kong and Tongzon (2006), Steinmann and Zweifel (2003), Sathye (2001), Miller and Noulas, (1996), Hasan and Marton (2003), Drake and Hall (2003), Akhigbe and McNulty, (2003), Esho (2001), Santomero and Seater (2000), De Young (1997), Barnum and Gleason (2006), Allen and Anoop (1996), Lozanzo-Vivas et al. (2002), Orea (2002), Staat (2006), Cook (2000), Clark and Siems (2002), Vennet (2002), Von Hirschhausen et al. (2006), Shujie et al. (2007), Wheelock and Wilson (1999), Athanassopoulos (1998), Peristiani (1997), Clark (1996), Berger et al. (1997) and Berger and Mester (1997). These studies may be considered examples and are not intended to be an exhaustive survey.

² In this case, the standardization of the DEA methodology seems to tolerate such comparisons of the size of the efficiency coefficients. However, one has to bear in mind the national differences in regulations, legal system, economic and financial markets conditions in the different countries, as well as the differences in the time period the research covers–that will surely results in different frontiers (see Berger, 2007).