Estimating efficiency of a South African bank using data envelopment analysis

Abstract

The greater competition and concentration in South Africa's financial sector has put South African banks under more constraints and led to questioning of their present performance. With a greater demand for financial services and more complains about the low quality of financial services and charges being too high, there has been increasing debate about how efficient South African banks really are. This study discusses performance evaluation, the traditional financial and non-financial measures used, and their limitations. The concept of bank efficiency is also briefly discussed, including scale efficiency, scope efficiency, X-efficiency, cost efficiency, standard profit efficiency, alternative profit efficiency and the risk component of bank efficiency. Data Envelopment Analysis (DEA) was chosen as the most appropriate method to estimate the scale efficiency and technical efficiency of 37 districts (and 10 provinces) of one of the largest banks in South Africa. 'DEA involves solving linear programming problems that generate a non-parametric, piecewise linear convex frontier that envelops the input and output data relative to which cost is minimized' (Fare et al., 1985b:193). The intermediation approach was used incorporating both the input- and output-orientated approach under variable returns to scale. The analyses indicated that 19 districts out of the 37 districts were not at least once fully technically efficient during the 22 months (input- and output-orientated). The same results were found with regard to scale efficiency: 17 districts out of the 37 districts were not at least once fully scale efficient (input-orientated) and 19 districts out of the 37 districts were not at least once fully scale efficient (output-orientated), during the 22 months. Synergy was found in 6 provinces out of the 10 provinces (input- and output-orientated).