An analysis of cost efficiency in the Jordanian banking sector

This paper investigates the level of cost efficiency in 17 Jordanian banks during the period 1996-2007 in which financial deregulation took place. The cost efficiency scores for each bank are obtained using the input-oriented DEA model. The cost efficiency is decomposed into allocative and technical efficiency levels. The allocative efficiency is quite high in the Jordanian banking sector. The average cost efficiency score of banks is 0.74, which implies that they could reduce the cost of production by 26 percent without reducing the level of output. The large banks are found most efficient in terms of cost efficiency (86%), allocative efficiency (92.7%) and technical efficiency (93%). The small banks rank second in terms of efficiency level. The cost efficiency of foreign banks is much lower than that of the domestic banks. While the cost efficiency shows a decline during the early and middle phase of deregulation, it shows large improvements in the final phase of financial deregulation in Jordan. Over the sample period, cost efficiency has increased at the rate of 1.55% per annum; the improvement in allocative efficiency has contributed about 60% of this.