Is Bigger Better for Egyptian Banks? An Efficiency Analysis of the Egyptian Banks during a Period of Reform 2000–2006

Abstract

This study contributes to the banking efficiency literature by using a three input–five output stochastic frontier translog cost function specification to investigate cost efficiency, scale economies, and technological progress in the Egyptian banking sector. The study analyzes the efficiency of Egyptian banks in the period 2000–2006 which witnessed major regulatory and structural changes. The analysis is based on a panel data of 34 commercial banks representing about 75% of the banking sector in Egypt. The results show that the banks suffer significantly from internal X-inefficiency with an average cost reduction potential of 12%. Increasing economies of scale are found to exist up to a bank size of about EGP30 bn, implying that all but the four largest banks in Egypt could reduce their average costs by growth. Surprisingly, Egyptian commercial banks did not benefit from technological change; instead they faced a negative dynamics of the cost frontier. Further regression analysis conducted to explain the different efficiency levels of the banks revealed a positive impact of size, growth, and merger activities on efficiency, which implies bigger is better for Egyptian Banks.

Assessing Macroeconomic Determinants of Banks’ Efficiency in the West African Monetary Zone

“…The study found that the three variables have different efficiency scores but privately owned older and small banks were more efficient than publicly owned younger and bigger banks. Still in Egypt, Farrag and Lang (2015) investigated the country's bank efficiency between 2000 and 2006, a period characterized by key regulatory and structural changes in the country. Analyzing a dataset of 34 banks, the authors found that technological change did not significantly benefit Egyptian banks, rather, the banks experienced a "negative dynamics of the cost frontier."…”