Efficiency and productivity growth of the banking sector in Jordan

Abstract

This study investigates the efficiency and productivity of the Jordanian banking sector, which consisted of 17 banks (two large, eight medium, four small and three foreign) during the period of financial deregulation, 1996-2007. It begins with the estimation of technical efficiency based on the input-oriented Data Envelopment Analysis (DEA) approach. To enable a comprehensive analysis, technical efficiency is decomposed into the product of pure technical efficiency and scale efficiency. This is followed by measuring cost efficiency, which is the product of technical and allocative efficiencies. Finally, the Malmquist Productivity Indices (MPI) are computed to examine the total factor productivity (TFP) change over the sample period. TFP change is decomposed into the products of technical efficiency change (catch-up) and technological change. The results reveal that the large banks are the most technically efficient in Jordan. The medium-sized banks have the lowest technical efficiency. There is a clear evidence of improvement (of about 0.37% per year) in the technical efficiency of banks during the sample period. The same is true of cost efficiency. Interestingly, the Jordanian banking sector as a whole shows a productivity growth of 3.5% per year, largely due to technological improvement. The productivity change among the domestic banks is much higher than that of the foreign banks during the entire deregulated period. Since the productivity growth during the regulated period of 1985-1995 was only 1.0% per annum, the higher productivity growth reported here during the deregulated period suggests that the banking sector has responded positively to the deregulation and liberalisation policies of the government.

Date of Award	2011
Original language	English