Efficiency, technical progress and productivity of Arab banks: A non-parametric approach

The objective of this article is to focus on the evolution of the Arab banks’ productive efficiency and the factors relating to their total productivity over the period 2000–2014. In order to study banks’ efficiency and productivity, we adopt estimation techniques based on the notion of distance function to calculate the technical efficiency, allocative efficiency, cost efficiency and the total productivity of the factors. The obtained results reveal that first, technical, allocative and cost inefficiencies of Arab banks are located around 13%, 21% and 30% respectively and, second, the dispersion of efficiency is important over the study period since the coefficient of variation ranges from 18% to 39%, depending on the measure of efficiency examined. We also observe that the productivity, measured by the Malmquist and Luenberger indexes, improved by around 2.44% and 1.79% respectively, but interestingly this improvement is fully explained by the positive variation in technical progress while the technical efficiency component registered a negative variation. The results obtained by the Data Envelopment Analysis (DEA) method indicate a level of efficiency and productivity comparable to those observed in the empirical literature. They reveal, also, the existence of a banking convergence procedure and catch-up to the best practices situated on the efficient frontier. Thus, restructuring and prudential reforms explain the amelioration of Arab banks’ efficiency and productivity. Finally, the factors found to be most important in explaining productivity improvements are bank size, profitability, equity ratio, and the economic growth rate, while the bank’s risk ratio is associated with the degradation of productivity.