ASSESSING BANK EFFICIENCY IN AN EMERGING MARKET: THE KUWAITI EXPERIENCE IN THE 1990S

Kuwait's banking system has experienced considerable difficulties in the past two decades due to financial and political shocks. In the aftermath of the Gulf War, government financial support re‐established confidence in the financial system, allowing banks to restore their balance sheets and increase profitability starting in the mid 1990s. This paper examines the performance of banks in Kuwait during the period of financial renaissance, 1994–1997. We provide an empirical assessment of the efficiency, productivity, and technological progress of banks on the basis of the Data Evelopment Analysis and the Malmquist Index. The empirical results suggest that Kuwaiti banks fail to optimally utilize a significant proportion of their resources. The sources of bank inefficiency appear to be both allocative (regulatory) and technical (managerial) in nature. The results also indicate that smaller banks in Kuwait are more efficient than larger ones, although all banks have improved their efficiency‐levels and experienced some gains in productivity.