Cost Efficiency, Technological Progress and Productivity Growth of Banks in GCC Countries
Posted: 10 Jun 2008
The structure of banking systems in GCC countries; namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates, has substantially changed over the past decade, mainly as a result of regional economic integration and banking deregulation. The new banking environment has given banks an incentive to focus on cost and productive efficiency. This study uses a non-parametric frontier approach to compare and contrast the efficiency performance, efficiency and technological change, and productivity growth of banks in GCC countries. The results indicate that banks in Oman, on average, have been the most efficient among GCC countries followed narrowly by banks from Bahrain and to a lesser extent by banks from Kuwait. In contrast, the findings point to a low efficient banking environment in UAE and Qatar, with Saudi Arabia being the least efficient. Additionally, the efficiency measures of banks in Oman and Kuwait has been descending from 1999 to 2004, while at the same time the efficiency scores of banks in Bahrain have been rising. Furthermore, banks from Oman and Bahrain are dominating the common efficient frontier since a larger percentage of banks from these countries lie on the frontier. Examination of return to scale measures provides evidence to indicate that there is very limited opportunity for banks to improve their scale efficiency, given that only a handful of banks are operating at increasing returns to scale. The result of the Malmquist productivity index reveals that banks on average have experienced a decline in productivity due to technological regress and to a lesser extent caused by a decline in overall technological efficiency.
Keywords: Banking cost efficiency; Malmquist productivity; GCC countries
JEL Classification: F3, G2
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