Estimating the Cost Productivity Index of Banks in Ghana

Abstract

The role of the banking sector in promoting economic growth cannot be underestimated. In view of this, the assessment of the performance of the banking industry is very important. Increasingly, a number of methods have been used to effectively account for the total factor productivity of banks. This study employed the Data Envelopment Analysis (DEA) cost Malmquist productivity analysis to assess the productivity of banks in Ghana. This is a technique that has strong roots in optimization techniques in operations management. The main aim of this study was to assess the cost productivity of banks in Ghana. An unbalanced panel data of Ghanaian banks for a fourteen year period from 2000 to 2013 was used for the study. According to the results the banking industry is cost productive and this is attributable to the ability of banks to take advantage of changes in price effect followed by technological changes (increasing introduction of technology) and finally technical efficiency change. The results show that the cost productivity index is largely complementary to the traditional productivity index, since it presents a fuller picture of Ghanaian banks’ performance. The cost productivity growth experienced by the industry is 3.2% and the technical productivity is 1.7%. Finally, environmental factors like competition, size, inflation rate, growth rate, treasury bill rate, capitalization, and foreign-ownership type significantly influence the cost productivity of banks in Ghana. However, regulatory standards like policy rate and universal banking business license do not significantly affect the cost productivity of banks in Ghana. In view of these findings the study recommends increased efforts from operations managers to periodically assess the cost productivities and to take advantage of the price changes, technological progress and technical efficiency change for the optimal operations in relation to cost productivity