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


  • Noha Farrag

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

  • Guenter Lang

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


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

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    References listed on IDEAS

    1. Joseph P. Hughes & Loretta J. Mester, 2008. "Efficiency in banking: theory, practice, and evidence," Working Papers 08-1, Federal Reserve Bank of Philadelphia.
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    16. 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.
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    More about this item


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

    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


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