Evaluating the Productive Efficiency of Lebanese Commercial Banks

International Management Review

Vol. 5 No. 1 2009

Evaluating the Productive Efficiency of Lebanese Commercial Banks:

Parametric and Non-Parametric Approaches

Wadad Saad and Chawki El-Moussawi

Faculty of Economics and Business Administration, Department of Economics,

Lebanese University, Branch 1, Lebanon

[Abstract] This paper uses two approaches to assess the cost efficiency of Lebanese commercial

banks: a nonparametric method, Data Envelopment Analysis, and a parametric method, Stochastic

Frontier Analysis. We considered 43 commercial banks over a period from 1992 to 2005. The findings

show that the average cost efficiency is quite high in both methods, and it is increasing over time. A

test of convergence of the efficiency scores was done and indicates that there is convergence of

efficiency levels of Lebanese banks between 1992 and 2005. Finally, we used an econometric model

to investigate the determinants of the efficiency scores of Lebanese banks using financial and

economic explanatory variables.

[Keywords] Bank, efficiency; data envelopment analysis; stochastic frontier analysis

Introduction

The Lebanese banking sector has witnessed significant changes since the early nineties. On

the regulatory side, the need to improve and adapt the Lebanese banking system to the

economic and financial changes, at the regional and international levels, has prompted

authorities to reform banking regulations in order to enhance the security of the banking

sector and to improve the functioning conditions of the banking market (reform of the system

of deposit insurance, adoption of the Cooke ratio, strengthening the internal control, and so

on.). The evolution of the banking activity has also resulted in the diversification of supply

and the increase of mergers and acquisitions that have led to a process of concentration of the

banking sector. It is, therefore, necessary to consider the impact of these developments on the

cost performance of the...