TESTING TECHNICAL AND SCALE EFFICIENCY OF KAZAKH BANKS: EVIDENCE BASED ON DATA ENVELOPMENT ANALYSIS

Year 2013, Volume: 5 Issue: 1, 271 - 282, 01.06.2013

Razzaque H Bhatti

Abstract

This paper tests technical and scale efficiency of 20 Kazakh banks using annual
data on three inputs (interest expenses, non-interest expenses and deposits) and
three outputs (interest income, non-interest income and loans) over the period
2007-2011. Two input-oriented data envelopment analysis models of Charnes et
al (1978) and Banker et al (1984), which are based on constant return to scale and
variable return to scale respectively, are used to evaluate technical efficiency,
whereas scale efficiency is computed by dividing the former efficiency ratio by
the latter one. The results obtained show that the average efficiency ratios of
individual banks under constant and variable returns to scale range from 0.88 and
1.00 to 0.93 and 1.00 respectively, whereas those of all banks between 0.95 and
0.98 respectively. Only are the five banks (ATFB, Citibank, HSBC bank,
KazInvest bank and Exim bank) the most efficient banks in Kazakhstan, since
their efficiency ratios have been consistently equal to unity, implying that these
banks operate at their optimal levels. The efficiency scores of the remaining 15
banks range from 0.88 to 0.99, and as such the majority of these banks do not
seem to operate far more below their optimal level. The results indicate that the
performance of the Kazakh banks deteriorated substantially during the global
financial crisis of 2008 because the CRS ratio dropped from 0.65 in 2007 to 0.50
in 2008 and to 0.40 in 2009. The results also confirm that most of the foreign
banks perform relatively better than domestic banks.

Keywords

Non-parametric method, Data envelopment analysis, commercial banks

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