After the financial crisis: a cost efficiency analysis of banks from Saudi Arabia

Abstract

Purpose

This paper aims to estimate the cost efficiency scores of banks in KSA before and during financial crisis by using a data envelopment analysis (DEA) approach.

Design/methodology/approach

The study uses the intermediation approach of banking services where banks are considered as manufacturing units. The research methodology consists of cost efficiency DEA and a second stage Tobit regression model.

Findings

The results reveal that banks in KSA are least affected by the crisis as the efficiency scores remain the same during all the periods. However, the average levels of inefficiency remain higher suggesting that KSA banks are lagging behind in exploiting the resources fully. The major source of cost inefficiency stems from allocative inefficiency rather than the technical one. Results of the Tobit regression also disclose that the impact of financial crisis across bank efficiency remains weak and inconclusive.

Research limitations/implications

The study bears some useful managerial implications for various stakeholders. Although banks do not seem to be affected by the crisis, yet they need to improve their efficiency since the levels are far below the frontier. For successful existence and growth of banking, it remains vital that these banks control their costs regardless of the fact are operating in a concentrated market.

Practical implications

The paper suggests that the banks in KSA need to bring down their operating expenses to reach the efficiency frontier. The average level of inefficiency (82 per cent) reflects a greater amount of input waste which needs to be controlled by these banks.

Originality/value

The study is novel in a way that it evaluates the cost efficiency performance of KSA banks before and during the financial crisis, followed by a second stage regression on the determinants of cost efficiency. It provides valuable insights to both the bank managers and public policy makers who can look for the optimal levels of efficiency and competitiveness of Saudi banking sector.

Citation

Hanif Akhtar, M. (2013), "After the financial crisis: a cost efficiency analysis of banks from Saudi Arabia", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 6 No. 4, pp. 322-332. https://doi.org/10.1108/IMEFM-05-2013-0059