Efficiency of Commercial Banks in Sub-Saharan Africa: A Comparative Analysis of Domestic and Foreign Banks

Abstract

This paper provides a comparative analysis of profit efficiency and cost inefficiency of commercial banks operating in 29 Sub-Saharan African countries during 2000-2007. Two-stage procedure is employed. The first method involves the estimation of profit and cost efficiency using the stochastic frontier approach. In the next stage, the Tobit regression is employed to provide cross-country evidence on the impact of environmental factors on efficiency of African commercial banks. Especially, it examines whether foreign banks are more profit efficient than domestic banks, while investigating relationships between bank efficiency and bank specific factors such as lending rate, deposit rate, funding claims strategy and net interest margin. It also investigates the impact of bank efficiency on those bank level factors as well as financial deepening (domestic credit to private sector, percent of GDP/money and quasi money (M2) as percent of GDP). Based on a range of performance ratios as well as stochastic cost and profit frontier estimation, with regard to the profit efficiency foreign banks have tended to outperform domestic banks. In particular, SSA foreign banks whose ownership is originated from Sub-Saharan African financial institutions with more than 50 percent share are more profit efficient than non Sub-Saharan African (Non-SSA) foreign banks. On the other hand, the

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