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2008 AEC - Empirical Study of Efficiency and Productivity of the Banking Industry in Egypt

13-Oct-2008

Starting from 1991 Egypt introduced a series of financial reforms to boost the efficiency and productivity of Egyptian banks by limiting state interventions and enhancing the role of market forces. Enticed by the tremendous transformation of this industry the current study measures the efficiency and productivity change of Egyptian commercial banks from 1995 to 2003 using non-parametric technique, namely, Data Envelopment Analysis (DEA) and Malmquist Productivity Index. Results indicate that over the period covered by this study Egyptian commercial banks’ technical inefficiency was 22 percent. In general, smaller banks were found to be least efficient. Malmquist results for a panel of 24 banks indicated that commercial banks productivity on average deteriorated by 4 percent per year during the study period. Moreover, most Egyptian banks operate at incorrect scale, a large majority experienced increasing returns to scale (IRS) in their operations, implying that substantial gains could be obtained from altering scale via either internal growth or consolidation in the sector. Our main policy recommendation for the government is to adopt policies that would foster competition in the banking sector and that the industry device incentive schemes to improve managerial efficiency through greater investment in technology and skill enhancements.

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