Measuring Bank operational efficiency using data envelopment analysis: A case study of Kenya Commercial Bank ltd

Abstract

This paper examines relative operational efficiency of 168 branches of KCB for the period between January and December 2010. The purpose is to determine the operational performance status of each branch with a view of improving efficiency. Secondary Input and output data from the bank was analyzed using Data envelopment analysis and for each branch the following information was determined: relative score, objective output and input targets, peer for each inefficient branch, slack outputs units and surplus input units. Relationship between relative score and location of branch or asset size were also examined and any relationship noted. The mean operational efficiency score for the bank was found to be approximately 65%. This figure was consistent with the reported cost-income accounting ratio for the year under study (2010). Small and large branches in terms of assets were found to be relatively more efficient than middle sized branches, while geographical location did not significantly affect relative operational efficiency score. Contrary to management belief that staff cost input is the main cause of inefficiency, this paper concludes that total asset input variable and interest receivable output variable are the main causes of inefficiency within the bank. Finally, several recommendations both to the bank and to researchers are made.