Determinants Of Commercial Banks Cost Efficiency In Ethiopia A Stochastic Frontier Analysis

The study analyzes the determinants of Ethiopian commercial banks’ cost efficiency using unbalanced sample of 12 commercial banks over the period 2000-2013 by employing a translog stochastic cost frontier approach. In order to examine bank specific factors which influence in (efficiency), a single stage maximum likelihood estimation procedure is applied to a stochastic cost frontier function. The findings show that bank specific factors of return on assets (ROA), return on equity (ROE) and intermediation ratio have a significant positive impact on cost efficiency of Ethiopian commercial banks. The result also shows that there is a positive insignificant relationship between bank size and cost efficiency. On the other hand, the capital adequacy ratio (CAR), with positive and significant coefficient, shows a positive relationship between this variable and total cost, which contributes to lower the banking efficiency. Thus, banks can improve their cost efficiency by way of improving their ROA, ROE, the method of advances. In addition they have to increase the share of capital by boosting banking investmentrnOperation.

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