Technical efficiency of commercial banks in the Gambia: an empirical analysis from 2005-2009

Abstract

The long term capability of commercial banks (CBs) to survive depend partly on how efficiently they are being ran (Mester, 1997). This study examines overall technical efficiency of commercial banks in the Gambia (six conventional banks and one Islamic bank), from 2005 to 2009. Also, the study examines the influence of banks’ specific characteristics on efficiency measures. Two stages of efficiency analysis are applied in this study. In the first stage, the study employs Data Envelopment Analysis (DEA) to measure the overall technical efficiency (OTE) - technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE) - under the assumption of Constant Returns to Scale (CRS) and Variable Returns to Scale (VRS). The study employs two inputs (operating expenses and total deposits) and two outputs (loans and advances and income) based on intermediation approach. Moreover, the study utilizes financial ratios (profitability and liquidity ratios) to measure the performance of Arab Gambian Islamic Bank (AGIB) for the period of 13 years (1997-2009). The second stage of the analysis examines the influence of banks’ specific characteristics (i.e. banks size, profitability and market power) on efficiency measures. The results from DEA indicate that the majority of Gambian banks are fully efficient in terms of PTE, under the assumption of VRS. Moreover, it is found that the main source of inefficiency of CBs in the Gambia from 2005-2009 is technical and scale inefficiency. In general, the results indicate that the main source of efficiency in the Gambia is pure technical efficiency. The study found that Trust Bank Limited (TBL) is the most efficient bank in the Gambia during the five years period, while International Commercial Bank (ICB) was found to have the lowest efficiency level in the same period. Interestingly, the Islamic bank AGIB is the second most efficient bank in the Gambia during the period (2005-2009). Although, the results from financial ratios show that AGIB is less profitable but more liquid during the period of 1997 to 2009. The results from linear regression, by using Tobit Regression Model illustrate that only bank’s size is significantly and positively associated with TE and SE, while both profitability and market power were negatively associated to TE and SE. This indicates that both profitability and market power did not have influence on efficiency measures of CBs in the Gambia.