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Efficiency and Expense Preference in the Philippines' Cooperative Rural Banks

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  • Lamberte, Mario B.
  • Desrochers, Martin

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 normal 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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Bibliographic Info

Paper provided by Philippine Institute for Development Studies in its series Discussion Papers with number DP 2002-12.

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Length: 24
Date of creation: 2002
Date of revision:
Handle: RePEc:phd:dpaper:dp_2002-12

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Related research

Keywords: agency costs; corporate governance; efficiency;

References

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  1. Robert A. Eisenbeis & Gary D. Ferrier & Simon H. Kwan, 1999. "The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding company performance," Working Paper, Federal Reserve Bank of Atlanta 99-23, Federal Reserve Bank of Atlanta.
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  13. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-10, Board of Governors of the Federal Reserve System (U.S.).
  14. Aly, Hassan Y, et al, 1990. "Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 211-18, May.
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  16. Joseph P. Hughes & Loretta J. Mester & Choon-Geol Moon, 2000. "Are Scale Economies in Banking Elusive or Illusive?," Departmental Working Papers, Rutgers University, Department of Economics 200004, Rutgers University, Department of Economics.
  17. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 405-431, November.
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Citations

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Cited by:
  1. Mamiza Haq & Michael Skully & Shams Pathan, 2010. "Efficiency of Microfinance Institutions: A Data Envelopment Analysis," Asia-Pacific Financial Markets, Springer, Springer, vol. 17(1), pages 63-97, March.
  2. Moreno, Frede G., 2004. "Good governance in microcredit strategy for poverty reduction: Focus on Western Mindanao, Philippines," EconStor Theses, ZBW - German National Library of Economics, number 100634.

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