Efficiency assessment of banking sector in Yemen using data envelopment window analysis

Fekri Ali Shawtari · Mohamed Ariff · Shaikh Hamzah Shaikh Abdul Razak

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Efficiency Analysis Using DEA Banking stability, regulation, efficiency Islamic Finance and Banking Studies

Abstract

Purpose – The purpose of this paper is to examine the banking industry’s efficiency using the case of Yemen. Design/methodology/approach – The paper utilises two-stage analysis to evaluate the efficiency adopting Data Envelopment Window Analysis (DEWA) in the first stage for the period 1996-2011. Furthermore, the paper addresses, in two-dimensional matrix, the stability and efficiency of the banking sector in order to assess their ability for survival. In the second stage, panel data analysis is applied to regress a set of bank-specific and macro-economic variables on the efficiency of the banking sector in Yemen in a comparative fashion between Islamic and conventional banks. Findings – The findings of the investigation indicate that the Yemeni banking industry in general was on a declining efficiency’s trend with increased instability during the later period of the investigation. In addition, the study shows that most conventional banks were relatively stable, though inefficient, while Islamic banks were more efficient over the time. The results of panel data regression further suggest that efficiency is related to a number of determinants. Loan/financing, and profitability are the common key determinants of efficiency for both Islamic and conventional banks. However, other determinants have impacted differently for Islamic and conventional banks, which could reflect the uniqueness of their operation and structure. Research limitations/implications – The present study provides a basis for the regulators and bankers to assess the viability of the banking sector and proposes policies to restructure the industry in order to enhance the performance of the whole industry. Originality/value – The paper presents new empirical findings on the efficiency of Islamic and conventional banks in Yemen.

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References

2001Econometric Analysis of Cross Section and Panel Data 1978Specification Tests in Econometrics 1984Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis 2003Analysis of Panel Data 1998An Introduction to Efficiency and Productivity Analysis 1997Efficiency of financial institutions: International survey and directions for future research 2007Robust Standard Errors for Panel Regressions with Cross-Sectional Dependence 1997Inside the black box: What explains differences in the efficiencies of financial institutions?

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