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Efficiency and Expense Preference in Philippines' Cooperative Rural Banks

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Author Info
Martin Desrochers
Mario Lamberte

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Abstract

This paper attempted to test whether efficient cooperative rural banks (CRBs) have a better control of their agency costs. We used two different concepts of efficiency, namely, cost efficiency and alternative profit efficiency, and found somewhat different results from both approaches. Using Stochastic Frontier Approach and Distribution Free Approach, we tested two different propositions. The first proposition is that an adequate corporate governance scheme should improve efficiency of CRBs. We failed to find very conclusive evidence that corporate governance theories apply to the Philippines’ CRBs. However, the results confirmed both managers’ compensation theory and large stakeholders theory. The second proposition is that agency costs should reduce efficiency of CRBs, and we found a much clearer relationship on that issue. As expected, most efficient CRBs are characterized by a better control of agency costs. These results are in accordance with previous studies on shirking behavior among mutual financial intermediaries. We also found that rural CRBs are most profit-efficient, despite their somewhat regular cost-efficiency, a manifestation that they are able to charge higher fees for the quality of services they offer. Large CRBs are not able to pass their higher costs to customers through higher fees. We found that small CRBs might have a better interest rate policy, that is, they offer lower rates on both loans and deposits.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0321.

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Date of creation: 2003
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Handle: RePEc:lvl:lacicr:0321

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Related research
Keywords: Agency costs; Corporate Governance; Stochastic Cost Function; X-Efficiency;

Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
G3 - Financial Economics - - Corporate Finance and Governance
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise

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