Banking cost efficiency, banking sector development and economic growth of SADC countries
This study explores the relationships among banking cost efficiency, banking sector development and economic growth in the Southern African Development Community (SADC) region. The study sought to provide answers to four sequentially structured questions: At what levels of cost efficiency do SADC banks combine their input factors − labour, capital, deposits, borrowings and other funding − to produce loans, interest and non-interest income? How have these cost efficiencies varied over the years, particularly during the pre-global financial crisis era and in the post-crisis period? In what direction, magnitude and significance do cost efficiency levels in the region change as a consequence of internal innovations, differences in the depth of banking sector development, macroeconomic environment, and quality of institutions? What is the nature of the relationship between banking cost efficiency, banking sector development indicators and economic growth? To shed light on these questions, an unbalanced panel of 12 SADC countries` banking data for the period 2005 −'15 for 63 sampled banks, totalling 693 observations was examined. The starting point was to employ the revised DEA procedure to compute the cost efficiency measures and further explore the variations in cost efficiency behaviour between time periods, using the Wilcoxon signed ranks test. The study provides evidence that banking cost efficiency is 77% in the region, with Namibia the most efficient banking sector and Mauritius the least efficient. Wider variability in efficiency performance is particularly observed in Angola, Botswana, Madagascar, Mauritius, Mozambique, South Africa and Zambia, highlighting greater scope for improvement in these countries. Bank managers, bank supervisors and policy-makers in the SADC region are implored to emulate and learn best practices from Namibia. In addition, the evidence shows that pre-crisis efficiency measures were significantly lower than those of the post-crisis period by 7.6%, implying that banking in the region has become increasingly efficient over time. Further examination of cost efficiency to understand their environmental factors using the censored Tobit regression reveals that bank cost efficiency is significantly and positively influenced by increased intermediation efficiency, high profitability, foreign ownership, and a stable macroeconomic environment of high growth, while negative influencers include low liquidity risk, poor asset quality or high credit risk, and in-creased systemic risk. The study also revealed that banking efficiency in the region is positively and significantly affected by political instability. Besides their statistical insignificance, large banks and highly diversified banks are found to be relatively more cost-efficient. Moreover, the results showed that high capital regulation in the banking industry inhibits cost efficiency; however its effect turned out to be statistically insignificant. Further-more, the study reveals a positive and significant link between banking cost efficiency, banking inclusion and real economic growth in the region, while financial deepening exerts a negative effect. So we submit that economic growth in the SADC region is inextricably intertwined with the efficiency with which banks operate and the nature of banking and financial development in the economy.