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

30-Nov-2008

In 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 a non-parametric technique called 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 the productivity of commercial banks deteriorated by four percent per year on average 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 recommendation for the government is to adopt policies that would foster competition in the banking sector. We also recommend that the industry devise incentive schemes to improve managerial efficiency through greater investment in technology and skills enhancement.

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