Exploring the operational efficiency of commercial banks in Zambia.

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Mwale, Isaac
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The University of Zambia
Zambia’s central bank – Bank of Zambia (BOZ) - has reported that the banking sector has been satisfactory in its performance and conduct, it has relied on financial ratio analysis, an approach which has been found to be inadequate in many aspects. Financial ratio analysis as a measure of efficiency can be considered problematic and rigid and may also fail to account for environmental and broad institutional factors as drivers of efficiency and performance. It also fails to differentiate between the different types of efficiency such as scale and x-efficiency. To circumvent these weaknesses, this study adopted a flexible and heuristic approach – the stochastic frontier approach – to unpack and define efficiency in terms of its operational meaning. A Tobit regression was undertaken to establish the determinants of efficiency as well as to investigate quantitatively the internal and external factors which underpin and drive efficiency in the banking sector. The study found that commercial banks in Zambia for the study period were inefficient of order of 10.3%. This suggests that, for the Zambian banking industry as a whole, mismanagement of resources may be an impediment to desirable performance. The Tobit regression revealed that foreign owned banks were on average more efficient than domestic banks, it also revealed that bank inefficiency in the Zambian banking sector was underpinned by bank profitability, high Capital adequacy, greater bank liquidity and high percentage of non-performing loans. Inefficiency means that banks are using a costly combination of inputs to produce a feasible level of output.
Thesis of Master of Business Administration in finance.