An evaluation of the efficiency of the banking sector in Zimbabwe

Abstract

The study evaluates the cost and revenue efficiency of the Zimbabwean banking sector using the data envelopment analysis and Tobit regression model. Revenue and cost efficiency increased between 2009 and 2012 as a result of economic stability and growth registered in the economy. The trend in efficiency was negatively affected during 2013-2014 as a result of declining economic growth and price controls, which were imposed on the banking sector. The study established that private banks were more revenue and cost efficient compared to public banks. Domestic banks were relatively cost and revenue efficient compared to foreign banks supporting the home field advantage hypothesis. Commercial banks were cost and revenue efficient compared to building societies. The main drivers of both cost and revenue efficiency are cost income ratio, capital adequacy, macroeconomic growth and inflation. The results mean that banking sector efficiency is dependent on the decisions of the bank regulators and bank management. It is recommended that the government should improve the operating environment for banks and desist from interfering with operation of market forces. Competition among banks should be encouraged to improve the efficiency of the banking sector.

Keywords: Cost and revenue efficiency, Data envelopment analysis, Tobit regression, Zimbabwe