Measurement of the efficiency of Lebanese commercial banks using data envelopment analysis

Abstract

Purpose -- The banking sector is the backbone of the backbone of the Lebanese economy, and Lebanese banks hold over half of the public debt. Therefore it is critical to periodically assess their efficiency and profitability. Failure to do so could lead the country to a debt crisis or even bankruptcy. The purpose of this study is the measure the efficiently and productivity of 24 Lebanese commercial banks in 2008, 2011 and 2013. Design/ methodology/ approach -- To measure relative efficiency, the study employed three data Envelopment analysis (DEA) models which are the CCR, BCC and A&P. the Wilcoxon matched pairs signed rank test was used to compare the efficiency scores of the different time periods. Finally, the Malmquist Total Factor Productivity (TFP) index was implemented to compute the productivity of the banks. Findings -- The CCR and BCC scores were high for the three years under study. 2013 witnessed the best efficiency levels, and an investigation of its scores showed that overall technical inefficiency was mainly due to pure technical inefficiency. The Wilcoxon matched pairs signed rank tests revealed that the average CCR and BCC efficiencies didn’t significantly change in the aftermath of the Global Financial Crisis, but they significantly increased after eruption of the Arab Spring. A comparison of the A&P scores with some key ratios of banks performance exposed no clear association between them. Finally, the Malmquist TFP index demonstrated that the productivity of banks improved by 6.3 % from 2008 to 2013. Research Limitations/ implications -- the limitations of this study are the accuracy of the published data for banks, and the drawbacks of the DEA methodology. Practical implications: The profitability challenges that banks are facing in the aftermath of the Global Financial Crisis make cost cutting and adopting more efficient operating models as important as ever. Additionally, the banking sector plays a crucial role in economies and namely the Lebanese economy. Therefore regulators and banks should periodically implement models similar to the DEA technique proposed in this study for efficiency measurement. Originality/ value: despite the continuous need for monitoring the efficiency of Lebanese banks, previous studies covered a period till 2009. Therefore, as a result of the rapid developments the sector has witnessed since then, their results are no longer credible. This study seeks to fill this gap by measuring the efficiency and productivity of Lebanese banks in more recent years.