Productivity of commercial banks in Kenya: a data envelopment analysis

Abstract

Starting from 1980s and early 1990s Kenya introduced a series of financial reforms to boost the efficiency and productivity of Kenyan banks. This study examines changes in commercial banks productivity in Kenya in the context of liberalization using Data Envelopment Analysis (DEA). method. The study is in two stages; the first stage measures the productivity growth and its components while the second stage examines the factors affecting Total Factor Productivity (TFP) growth. From a time series dataset consisting of information on commercial bank activities obtained from Central Bank. of Kenya's publications supplemented by a banking survey. D EA method is used to measure Malmquist index of total factor productivity for a total of 34 banks for the period 1999-2008. A decomposition of TFP measures is done to establish whether the change in factor productivity is due to technological change or to change in technical efficiency over the period in question. The study further examines the effect of asset composition. market share in deposit market. ownership structure and number of branches on productivity growth. The results demonstrate that the TFP deteriorated over the period while Efficiency change (EFFCH) increased as Technical Change (TECH) declined implying that TFP deterioration was due to either technological innovations or shocks. Given that technology is the main driver of productivity, Central Bank of Kenya should design practicable protocol as a technological standards requirement.