Efficiency and Productivity Change of Banks: Evidence from a Small Island Development State

Abstract

This paper employs a nonparametric approach to estimate the efficiency and productivity of the Mauritian banking sector during 2001-2006. The measurement of efficiency is done using the Data Envelopment Analysis (DEA). Productivity growth is decomposed into technical efficiency and technological change using the Malmquist indices. Using labour, fixed assets and loanable funds as inputs and total loans and fee based income as outputs in the analysis, it is observed that the mean efficiency score of banks in Mauritius when compared to other countries is lower. The Malmquist Total Factor Productivity results obtained indicate that annual productivity growth averaged 4.9% across all commercial banks and was largely attributable to technological progress. The results have important implications for bank managers, policy makers, bank regulators and other stakeholders of the Mauritian economy. It is believed that there is considerable scope for efficiency improvements in this sector, particularly for Mauritian Bank to consolidate and enhance their competiveness in the region.