What Drives the Efficiency of Selected Mena Banks? A Meta-Frontier Analysis

This study examines the effect of financial sector reform on bank performance in selected Middle Eastern and North African (MENA) countries in the period 1993-2006. We evaluate bank efficiency in Egypt, Jordan, Morocco and Tunisia by means of Data Envelopment Analysis (DEA) and we employ a meta-frontier approach to calculate efficiency scores in a cross country setting. We then employ a second-stage Tobit regression to investigate the impact of institutional, financial and bank specific variables on bank efficiency. Overall, the analysis shows that, despite similarities in the process of financial reforms undertaken in the four MENA countries, the observed efficiency levels of banks varies substantially across markets, with Morocco and Tunisia outperforming Egypt and Jordan. Differences in technology seem to be crucial in explaining efficiency differences. To improve banking sector efficiency, policies should be aimed at giving banks incentives to improve their capitalisation and liquidity. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency. Finally, increased investments and upgrading of the stock markets in the region would help banks improve their performance