Empirical Analysis of Efficiency of Community Banks in Tanzania

Efficient utilization of resources is critical for effective performance of banks. This paper measured efficiency of community banks in Tanzania and compares performance between two community banks¡¯ categories during 2002-2014. Efficiency was estimated using Data Envelopment Analysis (DEA) approach while the independent samples t-test was applied on means of efficiency to compare performance between the banks¡¯ categories. The paper establishes that, most community banks were inefficient, suggesting that there was effect of unnecessary additional costs on the banks performance. Despite the general poor performance, community banks in Tanzania were generally operating at a decreasing part of the average cost curve, which granted an opportunity for expansion and exploitation of scale economies. The paper further establishes that efficiency of respective categories of community banks did not differ significantly; implying that the bank type did not matter as regards efficiency issue. The policy implications are; community banks should effectively manage their cost structure in order to improve performance, and a separate regulatory framework should be applied to community banks to take care of their uniqueness.