An Evaluation of the Cost and Revenue Efficiency of the Banking Sector in Zimbabwe

Working paper 629
Sanderson Abel and Pierre Le Roux
Publication date: 
August, 2016

The study was meant to evaluate the cost and revenue efficiency of the Zimbabwean banking sector during the period 2009-2014. The study employed the Data Envelopment Analysis and the Tobit Regression methods. The estimation of cost and revenue efficiency shows that revenue and cost efficiency increased during the period 2009-2012. This coincided with high positive growth rates and economic stability. Efficiency declined in 2013-14 as a result of government controls on banking sector pricing and general decline in economic activity. The study found that private banks were more revenue and cost efficient compared to public banks. Domestic banks were relatively cost and revenue efficient compared to foreign banks supporting the home field advantage hypothesis. The study further found that commercial banks were cost and revenue efficient than building societies. Cost and revenue efficiency is determined by cost income ratio, capital adequacy, macroeconomic growth, and inflation. The results shows that credit risk is significant in explaining cost efficiency. The study recommends that the Zimbabwean government should improve the macroeconomic operating environment and desist from tampering with the smooth flow of market forces. The government should refrain from imposing anticompetitive measures as they negatively affect banking sector efficiency. Financial sector reforms which improve competition should be adopted to enhance efficiency.

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