Cost Efficiency of the Banking Industry in Malawi

Happy Phiri; Ben Kaluwa; Jacob Mazalale

doi:doi:10.11648/j.eco.20211004.16

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Cost Efficiency of the Banking Industry in Malawi

Happy Phiri, Ben Kaluwa, Jacob Mazalale

Published in Economics (Volume 10, Issue 4)

Received: 2 December 2021 Accepted: 22 December 2021 Published: 29 December 2021

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Abstract

Sustainable economic growth requires efficiency in the banking sector because of the vital role financial markets play in allocating resources. This study seeks to contribute to the discourse on banks' cost-efficiency performance in the context of market upheavals, evolving customer preferences, and industry and institutional reforms. The study examines the Malawi banking sector's cost-efficiency based on firm-level data from 2010 to 2019. The period coincided with significant developments in the sector namely: 1) the massive local currency (Malawi Kwacha) devaluation which impacted exchange rates against major trading currencies; 2) the adoption of International Financial Reporting Standard (IFRS) 9 that impacted credit risk measurement; 3) the adoption of Basel 2 framework that impacted the calculation of capital adequacy and; 4) mergers and acquisitions of banking institutions. Using single-stage translog Stochastic Frontier Analysis (SFA) applied to a cost function involving nine banks, the study finds that Malawi banks are on average, 8.5% cost-inefficient. Over the sample period, the results further indicate an upward trajectory for the sector’s mean cost efficiency levels. Across the banks, varied cost efficiency scores affirm the underpinnings of managerial and behavioural theories of the firm in supplementing the neoclassical microeconomic view of efficiency performance of the banking firm. Cost-efficiency scores have been positively influenced by the macroeconomic environment (inflation) and elements of bank heterogeneity (asset concentration and bank size). The contributions of other elements, namely, market concentration and funding risk (liquidity risk) have been negative, suggesting these as policy intervention areas for cost efficiency in the sector.

Published in	Economics (Volume 10, Issue 4)
DOI	10.11648/j.eco.20211004.16
Page(s)	164-174
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Banking Sector, Cost Efficiency, Stochastic Frontier Analysis, Malawi

References

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APA Style

Happy Phiri, Ben Kaluwa, Jacob Mazalale. (2021). Cost Efficiency of the Banking Industry in Malawi. Economics, 10(4), 164-174. https://doi.org/10.11648/j.eco.20211004.16

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Happy Phiri; Ben Kaluwa; Jacob Mazalale. Cost Efficiency of the Banking Industry in Malawi. Economics. 2021, 10(4), 164-174. doi: 10.11648/j.eco.20211004.16

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Happy Phiri, Ben Kaluwa, Jacob Mazalale. Cost Efficiency of the Banking Industry in Malawi. Economics. 2021;10(4):164-174. doi: 10.11648/j.eco.20211004.16

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@article{10.11648/j.eco.20211004.16,
  author = {Happy Phiri and Ben Kaluwa and Jacob Mazalale},
  title = {Cost Efficiency of the Banking Industry in Malawi},
  journal = {Economics},
  volume = {10},
  number = {4},
  pages = {164-174},
  doi = {10.11648/j.eco.20211004.16},
  url = {https://doi.org/10.11648/j.eco.20211004.16},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20211004.16},
  abstract = {Sustainable economic growth requires efficiency in the banking sector because of the vital role financial markets play in allocating resources. This study seeks to contribute to the discourse on banks' cost-efficiency performance in the context of market upheavals, evolving customer preferences, and industry and institutional reforms. The study examines the Malawi banking sector's cost-efficiency based on firm-level data from 2010 to 2019. The period coincided with significant developments in the sector namely: 1) the massive local currency (Malawi Kwacha) devaluation which impacted exchange rates against major trading currencies; 2) the adoption of International Financial Reporting Standard (IFRS) 9 that impacted credit risk measurement; 3) the adoption of Basel 2 framework that impacted the calculation of capital adequacy and; 4) mergers and acquisitions of banking institutions. Using single-stage translog Stochastic Frontier Analysis (SFA) applied to a cost function involving nine banks, the study finds that Malawi banks are on average, 8.5% cost-inefficient. Over the sample period, the results further indicate an upward trajectory for the sector’s mean cost efficiency levels. Across the banks, varied cost efficiency scores affirm the underpinnings of managerial and behavioural theories of the firm in supplementing the neoclassical microeconomic view of efficiency performance of the banking firm. Cost-efficiency scores have been positively influenced by the macroeconomic environment (inflation) and elements of bank heterogeneity (asset concentration and bank size). The contributions of other elements, namely, market concentration and funding risk (liquidity risk) have been negative, suggesting these as policy intervention areas for cost efficiency in the sector.},
 year = {2021}
}

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TY  - JOUR
T1  - Cost Efficiency of the Banking Industry in Malawi
AU  - Happy Phiri
AU  - Ben Kaluwa
AU  - Jacob Mazalale
Y1  - 2021/12/29
PY  - 2021
N1  - https://doi.org/10.11648/j.eco.20211004.16
DO  - 10.11648/j.eco.20211004.16
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 164
EP  - 174
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20211004.16
AB  - Sustainable economic growth requires efficiency in the banking sector because of the vital role financial markets play in allocating resources. This study seeks to contribute to the discourse on banks' cost-efficiency performance in the context of market upheavals, evolving customer preferences, and industry and institutional reforms. The study examines the Malawi banking sector's cost-efficiency based on firm-level data from 2010 to 2019. The period coincided with significant developments in the sector namely: 1) the massive local currency (Malawi Kwacha) devaluation which impacted exchange rates against major trading currencies; 2) the adoption of International Financial Reporting Standard (IFRS) 9 that impacted credit risk measurement; 3) the adoption of Basel 2 framework that impacted the calculation of capital adequacy and; 4) mergers and acquisitions of banking institutions. Using single-stage translog Stochastic Frontier Analysis (SFA) applied to a cost function involving nine banks, the study finds that Malawi banks are on average, 8.5% cost-inefficient. Over the sample period, the results further indicate an upward trajectory for the sector’s mean cost efficiency levels. Across the banks, varied cost efficiency scores affirm the underpinnings of managerial and behavioural theories of the firm in supplementing the neoclassical microeconomic view of efficiency performance of the banking firm. Cost-efficiency scores have been positively influenced by the macroeconomic environment (inflation) and elements of bank heterogeneity (asset concentration and bank size). The contributions of other elements, namely, market concentration and funding risk (liquidity risk) have been negative, suggesting these as policy intervention areas for cost efficiency in the sector.
VL  - 10
IS  - 4
ER  -

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Author Information

Happy Phiri

Department of Economics, University of Malawi, Zomba, Malawi
Ben Kaluwa

Department of Economics, University of Malawi, Zomba, Malawi
Jacob Mazalale

Department of Economics, University of Malawi, Zomba, Malawi

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APA Style

Happy Phiri, Ben Kaluwa, Jacob Mazalale. (2021). Cost Efficiency of the Banking Industry in Malawi. Economics, 10(4), 164-174. https://doi.org/10.11648/j.eco.20211004.16

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Happy Phiri; Ben Kaluwa; Jacob Mazalale. Cost Efficiency of the Banking Industry in Malawi. Economics. 2021, 10(4), 164-174. doi: 10.11648/j.eco.20211004.16

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AMA Style

Happy Phiri, Ben Kaluwa, Jacob Mazalale. Cost Efficiency of the Banking Industry in Malawi. Economics. 2021;10(4):164-174. doi: 10.11648/j.eco.20211004.16

Copy | Download

@article{10.11648/j.eco.20211004.16,
  author = {Happy Phiri and Ben Kaluwa and Jacob Mazalale},
  title = {Cost Efficiency of the Banking Industry in Malawi},
  journal = {Economics},
  volume = {10},
  number = {4},
  pages = {164-174},
  doi = {10.11648/j.eco.20211004.16},
  url = {https://doi.org/10.11648/j.eco.20211004.16},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20211004.16},
  abstract = {Sustainable economic growth requires efficiency in the banking sector because of the vital role financial markets play in allocating resources. This study seeks to contribute to the discourse on banks' cost-efficiency performance in the context of market upheavals, evolving customer preferences, and industry and institutional reforms. The study examines the Malawi banking sector's cost-efficiency based on firm-level data from 2010 to 2019. The period coincided with significant developments in the sector namely: 1) the massive local currency (Malawi Kwacha) devaluation which impacted exchange rates against major trading currencies; 2) the adoption of International Financial Reporting Standard (IFRS) 9 that impacted credit risk measurement; 3) the adoption of Basel 2 framework that impacted the calculation of capital adequacy and; 4) mergers and acquisitions of banking institutions. Using single-stage translog Stochastic Frontier Analysis (SFA) applied to a cost function involving nine banks, the study finds that Malawi banks are on average, 8.5% cost-inefficient. Over the sample period, the results further indicate an upward trajectory for the sector’s mean cost efficiency levels. Across the banks, varied cost efficiency scores affirm the underpinnings of managerial and behavioural theories of the firm in supplementing the neoclassical microeconomic view of efficiency performance of the banking firm. Cost-efficiency scores have been positively influenced by the macroeconomic environment (inflation) and elements of bank heterogeneity (asset concentration and bank size). The contributions of other elements, namely, market concentration and funding risk (liquidity risk) have been negative, suggesting these as policy intervention areas for cost efficiency in the sector.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Cost Efficiency of the Banking Industry in Malawi
AU  - Happy Phiri
AU  - Ben Kaluwa
AU  - Jacob Mazalale
Y1  - 2021/12/29
PY  - 2021
N1  - https://doi.org/10.11648/j.eco.20211004.16
DO  - 10.11648/j.eco.20211004.16
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 164
EP  - 174
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20211004.16
AB  - Sustainable economic growth requires efficiency in the banking sector because of the vital role financial markets play in allocating resources. This study seeks to contribute to the discourse on banks' cost-efficiency performance in the context of market upheavals, evolving customer preferences, and industry and institutional reforms. The study examines the Malawi banking sector's cost-efficiency based on firm-level data from 2010 to 2019. The period coincided with significant developments in the sector namely: 1) the massive local currency (Malawi Kwacha) devaluation which impacted exchange rates against major trading currencies; 2) the adoption of International Financial Reporting Standard (IFRS) 9 that impacted credit risk measurement; 3) the adoption of Basel 2 framework that impacted the calculation of capital adequacy and; 4) mergers and acquisitions of banking institutions. Using single-stage translog Stochastic Frontier Analysis (SFA) applied to a cost function involving nine banks, the study finds that Malawi banks are on average, 8.5% cost-inefficient. Over the sample period, the results further indicate an upward trajectory for the sector’s mean cost efficiency levels. Across the banks, varied cost efficiency scores affirm the underpinnings of managerial and behavioural theories of the firm in supplementing the neoclassical microeconomic view of efficiency performance of the banking firm. Cost-efficiency scores have been positively influenced by the macroeconomic environment (inflation) and elements of bank heterogeneity (asset concentration and bank size). The contributions of other elements, namely, market concentration and funding risk (liquidity risk) have been negative, suggesting these as policy intervention areas for cost efficiency in the sector.
VL  - 10
IS  - 4
ER  -

Copy | Download