Factor affecting technical efficiency of the banking sector: Evidence from Ethiopia

Figures & data

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

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

Table 3. Descriptive Statistics

Variable	Observations	Mean	Standard. Deviation	Minimum	Maximum
Output variables
Total loan and advances	119	19,054.18	38,925.62	270.00	234,030.00
Interest income	119	3,059.67	7,625.40	37.00	49,992.00
Total non-interest income	119	833.01	1,386.17	40.00	8,626.00
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 expense	119	1,229.09	3,101.63	12.00	21,340.00

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

Source: Own computation, 2021

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 Ethiopia	1	1	1	crs	1	1	1	crs	0.928	1	0.928	drs
Awash InternationalBank	0.914	1	0.914	drs	0.828	1	0.828	drs	0.937	1	0.937	drs
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 Oromia	1	1	1	crs	1	1	1	crs	1	1	1	crs
Lion International Bank	0.947	0.952	0.995	drs	1	1	1	crs	0.975	1	0.975	drs
Oromia International Bank	0.834	0.836	0.999	irs	0.733	0.755	0.97	irs	0.898	0.902	0.996	drs
Berhan International Bank	1	1	1	crs	0.985	1	0.985	irs	1	1	1	crs
Bunna International Bank S.c	1	1	1	crs	0.947	1	0.948	irs	0.99	0.993	0.997	irs
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 Bank Sc	1	1	1	crs	1	1	1	crs	1	1	1	crs
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
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

Source: Own computation, 2021

Table 6. Banks’ Technical and Scale Efficiency for 2017–2020

Banks	2017				2018				2019				2020
	crste	vrste	scale	RTS	crste	vrste	scale	RTS	crste	vrste	scale	RTS	crste	vrste	scale	RTS
Commercial Bank of Ethiopia	0.873	1	0.873	drs	0.899	1	0.899	drs	0.933	1	0.933	drs	0.84	1	0.84	drs
Awash International Bank	1	1	1	crs	1	1	1	crs	1	1	1	crs	1	1	1	crs
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 Oromia	1	1	1	crs	1	1	1	crs	1	1	1	crs	1	1	1	crs
Lion International Bank	1	1	1	crs	1	1	1	crs	1	1	1	crs	0.896	0.941	0.952	drs
Oromia International Bank	0.9	0.945	0.953	drs	1	1	1	crs	1	1	1	crs	1	1	1	crs
Berhan International Bank	1	1	1	crs	0.998	1	0.998	drs	0.984	1	0.984	drs	1	1	1	crs
Bunna International Bank S.c	0.995	0.997	0.998	irs	1	1	1	crs	1	1	1	crs	1	1	1	crs
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 Bank Sc	1	1	1	crs	0.961	0.966	0.995	irs	0.94	1	0.94	irs	1	1	1	crs
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
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

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

Source: Own computation, 2021

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

Source: Own computation, 2021

Table 9. Input and output slacks

		Output slacks			Input slacks
Banks		Total loan	Interest income	Interest income	Fixed assets	Deposit	Interest 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

Source: Own computation, 2021

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

Source: Own computation, 2021

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.

Table 11. TFP Growth in the Banking Sector, 2014–2020

Banks	Eff	TE	PE	SE	TFP
Commercial Bank of Ethiopia	0.971	0.956	1	0.971	0.928
Awash International Bank	1.015	1.018	1	1.015	1.033
Dashen Bank	1.022	1.037	0.995	1.028	1.06
Bank of Abyssinia	0.999	1.048	0.993	1.007	1.048
Wegagen Bank	0.999	1.044	1	0.999	1.043
United Bank	1.013	1.045	1	1.013	1.059
Nib International Bank	0.99	1.06	0.993	0.996	1.049
Cooperative Bank of Oromia	1	0.922	1	1	0.922
Lion International Bank	0.991	1.001	0.998	0.993	0.992
Oromia International Bank	1.031	0.95	1.03	1	0.979
Berhan International Bank	1	0.983	1	1	0.983
Bunna International Bank S.c	1	1.028	1	1	1.028
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 International Bank Sc	1	1.011	1	1	1.011
Debub Global Bank S.c.	1.01	0.98	1	1.01	0.99
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

Table 12. Descriptive statistics of variables in the Tobit model

Variable	Obs	Mean	Std. Dev.	Min	Max
Variables return to scale (VRTS)	119	0.9784958	0.0478753	0.731	1
Number of branch (NB)	116	243.931	299.3417	4	1825
Liquidity Risk (LIQ)	117	0.4982842	0.0772712	0.2963485	0.6547294
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 capitalization (LC)	115	0.1442424	0.0424791	0.037171	0.2595156
Log of Fixed Asset (logFA)	118	19.70629	1.459709	16.762	23.13988
Log of GDP (logGDP)	119	25.09109	0.210051	24.74167	25.40211
Inflation (INF)	119	11.96714	4.650997	6.63	20.35

Source: Own computation, 2021

Table 13. Robust Tobit regression result

variables	Coef.	Robust 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%),

Source: Own computation, 2021

Appendix A. Multicollinearity test result

Multicollinearity problem with MS, own, & NE			Multicollinearity problem without MS, own, & 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

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