The main objective of this study was to investigate the determining factors of commercial banks' efficiency in Ethiopia by using both parametric (SFA) and non-parametric test (DEA) approachs among 13 commercial banks that were enrolled throughout the study period from 2011–2020.
The study used secondary data from audited financial statements of each bank in the sample, the National Bank of Ethiopia and the Ministry of Finance and Economic Cooperation for non-financial statement variables. To estimate the technical efficiency score, both parametric (SFA) and non-parametric test (Data Envelopment Analysis -DEA) approaches were employed on input variables.
The empirical findings reveal substantial heterogeneity in technical efficiency among Ethiopian commercial banks. Over the study period, the aggregate efficiency scores demonstrate consistently high performance, with Overall Technical Efficiency (OTE) averaging 97%, Pure Technical Efficiency (PTE) at 98%, and Scale Efficiency (SE) reaching 99%. These results, derived from both Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA), underscore not only the operational competence of the sector but also highlight areas for potential scale optimization and managerial improvement.
The study suggests that bank management and policy makers should give attention to the internal and external factors of efficiency, which are highly significant variables to set direction for smart resource management and a technically efficient banking system.
This study applied both parametric (SFA) and non-parametric tests (DEA) approach by incorporating institutional level and macro-economic variables in the underdeveloped financial system context of Ethiopia, Africa. The findings of this study are valuable to the banking practitioners and policy-makers in the new milestone of Ethiopia's financial system, of launching the capital market and opening the banking industry to foreign banks after a close to a millennium.
