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2006 AEC - The Measurment and Determinants of X Inefficiency in Commercial Banks

11-Nov-2006

This paper uses the translog stochastic cost and profit frontier approach to measure the degree of x-inefficiency in a panel of 89 commercial banks drawn from nine SubSahara African countries, covering the period 1992-99. The paper then models the determinants of x-inefficiency in terms of bank-specific factors and general macroeconomic variables. It is found that profit x-inefficiency is slightly higher than cost x-inefficiency, which suggests that revenue x-inefficiency is rather small. The evidence also shows that the degree of cost x-inefficiency is exacerbated by bad loans, high capital ratios and financial liberalisation. In contrast, it is shown that larger banks are more efficient and the level of foreign bank penetration reduces x-inefficiency. These findings have important implications for bank managers and regulators in Sub-Saharan Africa.

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