Bank efficiency in Kenya

Abstract

Banks in their role of financial intermediation facilitate transfer of funds from surplus units to deficit units. Efficient banking institutions therefore ensure that allocation of funds is prioritized to viable investments and thus spur economic growth. This study employs a non-parametric DEA methodology to measure efficiency levels of Kenyan banks over the period 2004 to 2010. The differences in efficiency between foreign banks and domestic banks are then evaluated. Further, the study sought to establish the sources of bank efficiency for banks in Kenya. Foreign banks were found to be more efficient compared to domestic banks. However, an analysis of efficiency based on bank size reveal that large domestic banks are more efficient compared to large foreign banks. Estimation results further suggest that foreign banks import systemic inefficiencies. Foreign banks were found to have an appetite for government securities, further investigation is necessary to establish the motivation by foreign banks towards government securities.