Consistency conditions for bank efficiency analysis in Ghana: A comparison of parametric and non-parametric techniques

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This paper extends the concept of methodological crosschecking by examining whether bank efficiencies computed by the two frontier techniques, stochastic frontier analysis (SFA) and data envelopment analysis (DEA), are consistent. The study used a panel of 220 unbalanced observations from 27 Ghanaian banks between 2007 and 2016 to estimate cost and technical efficiencies and check for consistency using five criteria: efficiency distribution, ranking, ability to identify best or worst banks, stability of efficiencies, and relationship with accounting ratios. The results suggest that there is no consistency in the way parametric and non-parametric techniques rank or identify the best or worst banks. Also, there exists a weak relationship between the efficiency scores generated by both SFA and DEA and the non-frontier accounting ratios of Ghanaian banks. This suggests that the latter may contain some exogenous variables that make them weak measures of efficiency and should be used with caution, especially for bank supervision. However, the SFA approach yielded efficiency scores that were comparatively more stable over time. Therefore, the study concludes that the SFA approach is more practical and thus more appealing for regulatory purposes in Ghana due to the relatively consistent efficiency scores under the SFA approach compared to those under the DEA.

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  • JEL Classification (Paper profile tab)
    G21, E58, C33
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    39
  • Tables
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    0
    • Table 1. Descriptive statistics of the banking data
    • Table 2. Descriptive statistics of efficiency scores by concept and technique
    • Table 3. Spearman rank-order correlations of efficiency scores
    • Table 4. Identification of extreme banks by technique and concept
    • Table 5. Stability of measured efficiencies over time
    • Table 6. Spearman rank-order correlations between efficiencies and accounting ratios
    • Table 7. Identification of extreme banks by efficiencies and accounting ratios
    • Conceptualization
      John-Mark Akandekumtiim
    • Data curation
      John-Mark Akandekumtiim
    • Formal Analysis
      John-Mark Akandekumtiim
    • Funding acquisition
      John-Mark Akandekumtiim
    • Investigation
      John-Mark Akandekumtiim
    • Methodology
      John-Mark Akandekumtiim
    • Project administration
      John-Mark Akandekumtiim
    • Resources
      John-Mark Akandekumtiim
    • Software
      John-Mark Akandekumtiim
    • Visualization
      John-Mark Akandekumtiim
    • Writing – original draft
      John-Mark Akandekumtiim
    • Supervision
      Busani Moyo
    • Validation
      Busani Moyo
    • Writing – review & editing
      Busani Moyo