Efficiency and Expense Preference in Philippines' Cooperative Rural Banks

PIDS Discussion Paper No. 2002-12; CIRPEE Working Paper No. 03-21

27 Pages Posted: 19 May 2003

See all articles by Martin Desrochers

Martin Desrochers

Developpement International Desjardins

Mario Lamberte

Philippine Institute of Development Studies

Date Written: April 2003

Abstract

This paper attempted to test whether efficient cooperative rural banks (CRBs) have a better control of their agency costs. We used two different concepts of efficiency, namely, cost efficiency and alternative profit efficiency, and found somewhat different results from both approaches. Using Stochastic Frontier Approach and Distribution Free Approach, we tested two different propositions. The first proposition is that an adequate corporate governance scheme should improve efficiency of CRBs. We failed to find very conclusive evidence that corporate governance theories apply to the Philippines' CRBs. However, the results confirmed managers' compensation theory and large stakeholders theory. The second proposition is that agency costs should reduce efficiency of CRBs, and we found a much clearer relationship on that issue. As expected, most efficient CRBs are characterized by a better control of agency costs. These results are in accordance with previous studies on shirking behavior among mutual financial intermediaries. We also found that rural CRBs are most profit-efficient, despite their somewhat regular cost-efficiency, a manifestation that they are able to charge higher fees for the quality of services they offer. Large CRBs are not able to pass their higher costs to customers through higher fees. We found that small CRBs might have a better interest rate policy, that is, they offer lower rates on both loans and deposits.

Keywords: Agency costs, Corporate Governance, Stochastic Cost Function, X-Efficiency

JEL Classification: G2, G3, L2, L3

Suggested Citation

Desrochers, Martin and Lamberte, Mario, Efficiency and Expense Preference in Philippines' Cooperative Rural Banks (April 2003). PIDS Discussion Paper No. 2002-12; CIRPEE Working Paper No. 03-21, Available at SSRN: https://ssrn.com/abstract=382360 or http://dx.doi.org/10.2139/ssrn.382360

Martin Desrochers (Contact Author)

Developpement International Desjardins ( email )

Levis G6V 6P8, Quebec
Canada

Mario Lamberte

Philippine Institute of Development Studies ( email )

106 Amorsolo Street, Legapsi Village, Makati City
Manilla
Philippines

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