Estimating The Economies Of Scale In Ethiopian Banking Industry (A Panel Data Analysis)

Abstract

The paper aims to empirically test the existence and trend of scale economy in Ethiopian commercial banking industry using trans-log cost function. It also aims to investigate the level of scale economy in different bank groups. The impact of bank ownership on cost is also examined. A sample of nine commercial banks operating in Ethiopia is considered for the analysis. Descriptive and Econometric method of analysis are used. Panel Generalized Least Square (GLS) method of estimation is employed using quarterly data from 2008/09 (QIV) to 2013/14(QIV). A total of 16 econometric panel models are estimated. In calculating prices of labor, physical capital and funds the most widely recommended proxies are used in the course of estimation. The results indicated that the banking industry in Ethiopia reap economies of scale in all periods of the analysis, and still not reach at the minimum efficient scale of production (MC = AC). The trend confirmed that the industry is approaching the minimum efficient scale of production. Like the industry, all bank groups enjoy economies of scale benefit in the analysis period. Regarding the effect of ownership on cost structure, public banks are less cost efficient than private banks. Finally, the researcher forward recommendation for concerned bodies.