Application of DEA in the evaluation of bank efficiency in Zimbabwe: A comparative analysis of multi-currency era and Zimbabwean dollar period (2004- 2010)

Abstract

Banks are very important intermediaries in the economy. They eliminate the informational problems between surplus economic units and deficit economic units by monitoring the latter and ensuring a proper use of the depositors’ funds. An efficient financial sector should reduce transaction costs and thus increases the share of savings channelled into productive investments. In the past eight years Zimbabwe’s economy recorded negative growth rates, but measures put in place in the past two years were highly targeted on the achievement of positive growth rates. Attainment of the set economic targets relies so much on a well functioning financial sector. The main objective of the study was to ascertain bank efficiency scores of Zimbabwean banks for the two currency periods understudy, that is the Zimbabwe dollar era and multicurrency era. Furthermore an analyses on the degree of improvement required for each bank to be efficient was carried-out. The study utilised the financial intermediation approach based on data envelopment analysis. The methodology had two inputs and two outputs; total deposits , interest expenses , total loans and advances, and interest income. Adoption of multi-currency in 2009 was associated with a drop in bank efficiency. All private owned banks, both foreign and locally owned banks, recorded higher efficiency scores as compared to the publicly owned banks, both foreign and locally owned banks .Bank efficiency of seven of the banks understudy improved under the multi-currency regime, whilst six banks recorded a decline of bank efficiency in multi-currency. Year 2004 had four banks with efficiency scores of 100%, whereas 2009 had three banks and lastly 2010 has two banks. Under this criteria year 2004 is more efficiency than the two periods in multi-currency, however year 2004 had four banks with efficiency scores below 50%, 2009 has three banks and lastly 2010 has one bank. Migration of an entity from one banking type to another, resulted a drop on bank efficiency .Size of a bank in terms of deposits does not translate to high bank efficiency. The low efficiency of foreign owned banks during the Zimbabwean dollar era was attributed to restrictive credit creation policies. The bank inefficiency in 2009 was mainly caused by high interest expenses emanating from liquidity challenges associated with the use of foreign currencies in place of the domestic currency. Banks with the least requirement adjustment for interest expense during year 2010 were expected to increase their loans and advances in order to achieve efficiency, in an environment characterised by liquidity improvements.