The use of DEA in measuring efficiency in Arabian banking

Al-Jarrah, Idries Moh'd
December 2007
Banks & Bank Systems;2007, Vol. 2 Issue 4, p21
Academic Journal
The Data Envelopment Analysis Analysis (DEA) approach is used to investigate the cost efficiency levels of banks operating in Jordan, Egypt, Saudi Arabia and Bahrain over 1992-2000. The estimated cost efficiency is further decomposed into technical and allocative efficiency at both variable and constant return to scale. Later on, the technical efficiency is further decomposed into pure technical and scale efficiency. Our cost efficiency scores ranged from 50 to 70% with some variations in scores depending on bank's size and its geographical locations. These results suggest that the same level of output could be produced with approximately 50-70% of their current inputs if banks under study were operating on the most efficient frontier. This level of inefficiency is more than the range of 10-15% for the 130 studies surveyed by Berger and Humphrey (1997) and Berger and DeYoung (1997). This level is also more than the level of inefficiency found in European studies including Carbo et al.'s (2000) whose findings for a sample of banks from twelve countries, show mean cost inefficiency of around 22% for the period of 1989 - 1996.


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