Efficiency and productivity change of banks: Mauritian evidences.

Author:Boopen, Seetanah
Position:Report
 
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  1. INTRODUCTION

    The effect of deregulation on bank efficiency has become an important issue lately and there are numerous studies which has been examining this issue recently. Theoretically, deregulation is expected to unleash competitive forces and such competition would, in turn, enable banks to alter their input and output mix, which when combined with technological developments facilitates increase in output that raises overall bank productivity and efficiency. Moreover liberal entry of private and foreign banks as a part of the deregulation process is associated with superior management practices and technology. Different ownership structures following deregulation is also believed to engender different efficiency levels by bringing capital market discipline and enhancing owners' control over management. Finally, as banking in the current world is technology driven and technological progress itself is scale augmenting, the relationship between bank size and efficiency becomes important. Since financial deregulation has been essentially undertaken in developed countries, earlier studies have been confined to the developed world. Evidences from developing countries (Humphrey, 1997), particularly from an Africa perspective, have been indeed scant. Interestingly, many such countries have recently embarked financial deregulation policies during the last decade and they are now experiencing competitive banking practices. Mauritius is no exception and as an emerging market in the African region it has already established itself as a competitive and important market not only for financial products but also for other products. Nowadays, the Mauritian banking is a considerable component in African financial affairs. The present study examines the efficiency and productivity change of banks in Mauritius. First, it employs a non-parametric Data Envelopment Analysis (DEA), to calculate the overall, technical, pure technical, allocative and scale efficiencies of a panel of Mauritian banks over 2001-2006 periods. In the second instance it applies a Malmquist DEA method to the panel data overtime and Malmquist total factor productivity (TFP) indices are calculated. These indices will help to examine productivity improvement of Mauritian banks over time in other countries. Such a study is important both from operational as well as academic point of view. It will exhibit the expansion potentials of Mauritian banks in a mixed banking system and will also have policy implications for the banking system as how to improve efficiency. Moreover this research might suggest policy measures to improve price efficiency of the banking system of financial markets and is deemed important for policy makers, industry leaders and other stake holders. Given the limited number of study undertaken for developing countries this work attempts to supplement the literature bringing new evidence from a small and deregulated open economy in the African region.

    This rest of the paper is organised as follows: The next section briefly reviews the literature pertaining on bank efficiency and productivity change. Section 2 gives the overview of Mauritian banking industry and an overview of the banking supervision and regulation in Mauritius. Section 4 presents the models and the data and contains the empirical results. The final section summarises the findings and discusses some implied policy recommendations.

  2. BRIEF RELATED LITERATURE:

    There has been substantial research effort into studying bank efficiency, but a more modest effort into measuring productivity in this industry. The efficiency and productivity growth studies have differed mainly in the efficiency and productivity concept used and measurement method used. Moreover, the majority of the studies surveyed have been devoted to the US and banking sector. Earlier research studied the cost structures of banks by examining the existence of scale and scope economies and indices of productive, technical, and allocative efficiency. It is only recently that studies attempted to examine efficiency and productivity changes of financial institutions. US studies generally found little or negative cost productivity change (Berger and Humphrey, 1992; Bauer et al., 1993; Berger and Mester, 1997). Another popular strand of studies analysed the productivity change of banks. In this Total Factor Productivity (TFP) measures changes in total output relative to inputs and the concept is derived from the ideas of Malmquist (1953) and the distance function approach. A number of authors have used the Malmquist index to study productivity change of which features, Alam...

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