Efficiency Analysis of Commercial Bank Branches: The Case of Berhan Bank Sh. Co.

Abstract

Ensuring efficiency is critical for banks to continually play their role of financial intermediary in mobilizing financial resources and channeling towards productive investment ventures. Thus, this study investigates and discusses on the operating efficiency of 61 branches in Berhan bank between years 2015 and 2020. Secondary data from the internal reports of the Bank were used. A non-parametric linear programing model Data Envelop Analysis (DEA) was employed on input variables (personnel expense and other operating expense) and output variables (annual deposit collected) focusing on output-oriented comparison to estimate the operating efficiency of branches. The finding indicates that both technical and scale efficiency of the branches were very low, with an average 31% and 71 %, respectively and it’s below the best practice frontier of 1 (100%). Meanwhile, 99 percent of the branches operating at an increasing economy of scale. Therefore, most of the branches are operating below the best practice production frontiers and they have the capacity to improve productivity by 29 percent. By geographic location, Addis Ababa city branches have relatively better efficiency compared to branches located in other regions. Looking at the seasonality of branches, the seasoned ones have better average efficiency than their newest counterparts. Therefore, it is recommended that the Bank should design effective deposit mobilization strategy that networks potential market segments, implement branch standardization by focusing on selection of appropriate benchmarks, attain the branches’ most productive scale size through the elimination of scale inefficiencies ,with minimal changes to branches ‘scale size ( revise overall planning process), on branch level resource allocation, invest on managerial skill of personnel to improve branch level leadership and launch technology banking.