IDEAS home Printed from https://ideas.repec.org/p/guc/wpaper/33.html
   My bibliography  Save this paper

The Egyptian Banking Sector: Assessing Efficiency Using a Stochastic Frontier Cost Function

Author

Listed:
  • Noha Farrag

    (Faculty of Management Technology, The German University in Cairo)

  • Guenter Lang

    (Faculty of Management Technology, The German University in Cairo)

Abstract

This paper analyzes the cost efficiency of Egyptian banks in a period that witnessed major regulatory and structural changes. Using the full set of Egyptian commercial banks over the period 2000 to 2006, a multi-output cost function is specified and estimated by a stochastic frontier model. The results show that the banks suffer significantly from internal X-inefficiency, where the average distance to the frontier is about 12%. Increasing economies of scale are found to exist up to a bank size of about EGP 30bn ($ 5bn), implying that all but the four largest banks in Egypt could reduce their average costs by growth. Surprisingly, Egyptian banks did not benefit from technological change, but instead faced a negative dynamics of the cost frontier. Second-stage regressions, conducted to explain the different efficiency levels of the institutions, revealed a positive impact of size, growth, and merger activities on inefficiency. Summarizing, the statement “the bigger, the better” describes pretty well the current status of the Egyptian banking industry, encouraging further growth and consolidation by mergers and acquisitions.

Suggested Citation

  • Noha Farrag & Guenter Lang, 2012. "The Egyptian Banking Sector: Assessing Efficiency Using a Stochastic Frontier Cost Function," Working Papers 33, The German University in Cairo, Faculty of Management Technology.
  • Handle: RePEc:guc:wpaper:33
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-462, July.
    2. Joseph P. Hughes & Loretta J. Mester, 2008. "Efficiency in banking: theory, practice, and evidence," Working Papers 08-1, Federal Reserve Bank of Philadelphia.
    3. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    4. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1, July.
    5. David C. Wheelock & Paul W. Wilson, 1995. "Evaluating the efficiency of commercial banks: does our view of what banks do matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 39-52.
    6. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.
    7. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    8. Berger, Allen N, 2003. "The Economic Effects of Technological Progress: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 141-176, April.
    9. Lang, Gunter & Welzel, Peter, 1999. "Mergers among German Cooperative Banks: A Panel-Based Stochastic Frontier Analysis," Small Business Economics, Springer, vol. 13(4), pages 273-286, December.
    10. Noulas, Athanasios G & Ray, Subhash C & Miller, Stephen M, 1990. "Returns to Scale and Input Substitution for Large U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 94-108, February.
    11. Lang, Gunter & Welzel, Peter, 1996. "Efficiency and technical progress in banking Empirical results for a panel of German cooperative banks," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1003-1023, July.
    12. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275, November.
    13. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300, National Bureau of Economic Research, Inc.
    14. Ahmed Mohamed Badreldin & Christian Kalhoefer, 2009. "The Effect of Mergers and Acquisitions on Bank Performance in Egypt," Working Papers 18, The German University in Cairo, Faculty of Management Technology.
    15. Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 254-282, February.
    16. Ihsan Isik & M. Kabir Hassan, 2002. "Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation," The Financial Review, Eastern Finance Association, vol. 37(2), pages 257-279, May.
    17. Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163.
    18. Altunbas, Y. & Chakravarty, S. P., 2001. "Frontier cost functions and bank efficiency," Economics Letters, Elsevier, vol. 72(2), pages 233-240, August.
    19. Lawrence, Colin, 1989. "Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 368-379, August.
    20. Adnan Kasman, 2002. "Cost Efficiency, Scale Economies, and Technological Progress in Turkish Banking," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 1-20.
    21. Abu-Bader, Suleiman & Abu-Qarn, Aamer S., 2008. "Financial development and economic growth: The Egyptian experience," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 887-898.
    22. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    23. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-1266, September.
    24. Cavallo, Laura & Rossi, Stefania P. S., 2001. "Scale and scope economies in the European banking systems," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 515-531, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Farrag Noha & Lang Günter, 2015. "Is Bigger Better for Egyptian Banks? An Efficiency Analysis of the Egyptian Banks during a Period of Reform 2000–2006," Review of Middle East Economics and Finance, De Gruyter, vol. 11(3), pages 225-248, December.
    2. Christian Castro & Jorge E. Galán, 2019. "Drivers of Productivity in the Spanish Banking Sector: Recent Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(2), pages 115-141, June.
    3. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.
    4. Schure, Paul & Wagenvoort, Rien & O'Brien, Dermot, 2004. "The efficiency and the conduct of European banks: Developments after 1992," Review of Financial Economics, Elsevier, vol. 13(4), pages 371-396.
    5. Hakan Güneş & Dilem Yıldırım, 2016. "Estimating Cost Efficiency of Turkish Commercial Banks under Unobserved Heterogeneity with Stochastic Frontier Models," ERC Working Papers 1603, ERC - Economic Research Center, Middle East Technical University, revised Mar 2016.
    6. Mai, Nhat Chi, 2015. "Efficiency of the banking system in Vietnam under financial liberalization," OSF Preprints qsf6d, Center for Open Science.
    7. Bos, Jaap W. B. & Heid, Frank & Koetter, Michael & Kolari, James W. & Kool, Clemens J. M., 2005. "Inefficient or just different? Effects of heterogeneity on bank efficiency scores," Discussion Paper Series 2: Banking and Financial Studies 2005,15, Deutsche Bundesbank.
    8. Barros, Carlos Pestana & Williams, Jonathan, 2013. "The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 98-108.
    9. Williams, Jonathan, 2004. "Determining management behaviour in European banking," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2427-2460, October.
    10. Vaneet Bhatia & Sankarshan Basu & Subrata Kumar Mitra & Pradyumna Dash, 2018. "A review of bank efficiency and productivity," OPSEARCH, Springer;Operational Research Society of India, vol. 55(3), pages 557-600, November.
    11. Dániel Holló & Márton Nagy, 2006. "Bank Efficiency in the Enlarged European Union," BIS Papers chapters, in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 217-35, Bank for International Settlements.
    12. Laurent Weill, 2004. "Measuring Cost Efficiency in European Banking: A Comparison of Frontier Techniques," Journal of Productivity Analysis, Springer, vol. 21(2), pages 133-152, March.
    13. Esho, Neil, 2001. "The determinants of cost efficiency in cooperative financial institutions: Australian evidence," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 941-964, May.
    14. M. Koetter, 2004. "The Stability of Efficiency Rankings when Risk-Preference are Different," Working Papers 04-08, Utrecht School of Economics.
    15. Martín-Oliver, Alfredo & Ruano, Sonia & Salas-Fumás, Vicente, 2013. "Why high productivity growth of banks preceded the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 688-712.
    16. Williams, Jonathan & Nguyen, Nghia, 2005. "Financial liberalisation, crisis, and restructuring: A comparative study of bank performance and bank governance in South East Asia," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2119-2154, August.
    17. Laurent Weill, 2006. "Cost efficiency of Belgian banks during the 90s," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 49(1), pages 21-36.
    18. Franz R. Hahn, 2005. "Determinants of Bank Profitability in Austria. A Micro-Macro Approach," WIFO Studies, WIFO, number 25688, February.
    19. Carvallo, Oscar & Kasman, Adnan, 2005. "Cost efficiency in the Latin American and Caribbean banking systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(1), pages 55-72, January.
    20. Koutsomanoli-Filippaki, Anastasia & Mamatzakis, Emmanuel, 2009. "Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2050-2061, November.

    More about this item

    Keywords

    Banking; Egypt; translog cost function; panel; X-efficiency; economies of scale; technological change; mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:guc:wpaper:33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr.Dina Yousri (email available below). General contact details of provider: https://edirc.repec.org/data/fmguceg.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.