Factor affecting technical efficiency of the banking sector: Evidence from Ethiopia

AbstractAn efficient bank is more robust to shocks, fosters competitiveness, and promotes stability of the financial system. This study estimates Ethiopia’s commercial banks’ level of efficiency and its determinants during the period 2014–2020. Data Envelopment Analysis (DEA), Malmquist DEA, and Tobit regression were employed to analyze the data. The result indicated that the average efficiency score of banks in the constant returns to scale (CRS), variable returns to scale (VRS), and scale efficiency (SE) models were 95.5%, 99.85%, and 96.95% , respectively. Furthermore, in the VRS model, a state bank is more efficient than private banks. During the study period, the Total Factor Productivity (TFP) of Banks improved by 1%. According to the Tobit model, the efficiency of banks grows with an increment in the number of branches, bank size, and credit risk. However, when, liquidity risk and the log of the fixed asset increase, bank efficiency will decrease. The level of capitalization, log of GDP, and inflation, on the other hand, do not influence bank efficiency. Therefore, banks should pay close attention to aspects that influence technical efficiency

Determinants of bank stability in Ethiopia: A two-step system GMM estimation

AbstractStudies on the determinants of bank stability conclude that bank-specific and external factors affect bank financial stability. However, most of these studies are conducted in developed countries, where Banks, on average, are richer and have more liquidity. This study evaluates the effect of bank-specific and external factors on Bank Stability in a least developed country—Ethiopia using commercial banks data from 2014 to 2020. By using Two-Step System Generalized Method of Moments (GMM) estimation, we find that bank lending rate, tangibility, GDP growth rate, control of corruption, and rule of law effectiveness stabilize bank financial stability. The effect is more pronounced for Banks with high market share of mobilized capital. On the other hand, bank concentration and bank efficiency reduce bank financial stability by about 2.51 and 0.97 units, respectively. Furthermore, the effect of historical level of bank stability has a positive and significant effect on current level of bank financial stability. The implication of this result is vital for policy-makers, as it explicitly suggests that keeping bank stability today has a vital role in achieving higher bank stability in the future