Year

2008

Degree Name

Doctor of Philosophy

Department

School of Economics - Faculty of Commerce

Abstract

The productivity and efficiency of the financial sector is pivotal to the attainment of economic growth and development in developed and developing economies alike, and is of particular interest in the wake of financial sector reform and restructuring. The financial system in Botswana has undergone major structural and institutional changes in recent years. Throughout the 1980s a series of financial reforms were introduced to boost the efficiency and productivity of financial institutions by enhancing the crucial role of market forces (BoB, 1999). New entrants to the system and new products such as Automated Teller Machines (ATM), credit and debit card services were permitted as a result. To date, no study has been carried out to assess the impact of these reforms on the efficiency of financial institutions in Botswana. The main aim of this study is to conduct an empirical investigation of financial institutions in Botswana with a view to assessing their technical efficiency and productivity. By investigating technical efficiency and productivity among financial institutions in Botswana, this study addresses the following three questions: a) What is the mean efficiency score of financial institutions in Botswana? b) What is the total factor productivity change for Botswana’s financial institutions? c) What are the major determinants of efficiency in the context of Botswana’s financial institutions? Data envelopment analysis, which is a non-parametric approach, is employed in this study to analyse empirically the technical efficiency and productivity of financial institutions in Botswana. In order to assess the robustness and sensitivity of the results, three approaches namely, value-added approach, intermediation approach and operating approach are employed in defining the inputs and outputs of the institutions. The results suggest an asymmetry between institutions regarding their technical efficiency under different approaches over the years. Similar to Dos and Ghosh (2006), the yearly technical efficiency estimates under the value-added approach are mostly higher than those of the other two approaches. This is because DEA is a flexible technique and produces efficiency scores that are different when alternative sets of inputs and outputs are employed. Most of the inefficiency identified stem from the under utilisation of resources, as well as from the current scale of operation. This is consistent with other studies, for example, Rangan et al. (1988); Favero and Papi (1995); Taylor et al. (1997); Sathye (2001); Drake (2001) and Neal (2004). The overall average efficiency score under the three approaches during the sample period for Botswana’s financial institutions is 0.62. This figure lies below other efficiency indices reported in other studies (for example see, Sathye (2003)), and this suggests that the banks in Botswana are performing relatively poorly. In terms of productivity analysis, the results indicate that there has been a loss or little productivity growth at the frontier during the period in question, although there has been some improvement in the relative efficiency of most of the financial institutions in Botswana. The loss in total factor productivity has, therefore, been mostly due to technological regress. The empirical results demonstrate that foreign institutions are, overall, relatively more efficient than their public counterparts under the three approaches. It is unlikely that public institutions, by virtue of undertaking most of the government borrowing programs, can generate a significant fee-based income from this source. The poor overall productivity performance of Botswana’s financial sector is cause for concern, as it is likely to constrain the growth and development of the overall economy. As a consequence, the authorities will need to rethink their reform measures to date with the objective of stimulating more competition in the marketplace. This thesis has made three significant contributions to the analysis efficiency in financial institutions. First, this is the first study to address the issue of efficiency and productivity in Botswana’s financial institutions using DEA and Malmquist indices. Second, this study has employed a larger category of financial institutions than that of other studies. Finally, no previous study has assessed efficiency, productivity and their determinants in one study. This study, therefore, extends the existing literature by assessing the efficiency, productivity and the determinants as one study.

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