The Egyptian Banking Sector: Assessing Efficiency Using a Stochastic Frontier Cost Function

Noha Farrag () and Günter Lang ()
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Noha Farrag: Faculty of Management Technology, The German University in Cairo

No 33, Working Papers from The German University in Cairo, Faculty of Management Technology

Abstract: This paper analyzes the cost efficiency of Egyptian banks in a period that witnessed major regulatory and structural changes. Using the full set of Egyptian commercial banks over the period 2000 to 2006, a multi-output cost function is specified and estimated by a stochastic frontier model. The results show that the banks suffer significantly from internal X-inefficiency, where the average distance to the frontier is about 12%. Increasing economies of scale are found to exist up to a bank size of about EGP 30bn ($ 5bn), implying that all but the four largest banks in Egypt could reduce their average costs by growth. Surprisingly, Egyptian banks did not benefit from technological change, but instead faced a negative dynamics of the cost frontier. Second-stage regressions, conducted to explain the different efficiency levels of the institutions, revealed a positive impact of size, growth, and merger activities on inefficiency. Summarizing, the statement “the bigger, the better” describes pretty well the current status of the Egyptian banking industry, encouraging further growth and consolidation by mergers and acquisitions.

Keywords: Banking; Egypt; translog cost function; panel; X-efficiency; economies of scale; technological change; mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: G21 L89 M21 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-11
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