The economics of GCC banking efficiency
This thesis analyses the cost and profit efficiencies of the GCC banking sector over the period 1995-2000. Efficiencies are estimated using the most recent frontier technique, the Fourier Flexible form. The thesis also uses a logistic regression model to estimate the determinants of GCC banking efficiency. The findings show that the level of inefficiencies in the GCC banking industry ranges between 8 and 10% for costs, and 30 and 32 % for profits. There are no major differences in banks inefficiency levels among GCC countries. Moreover, inefficiencies show almost stable trends over 1995-2000. Comparisons of inefficiency levels across bank ownership type and assets size reveal that national banks are more cost efficient but less profit efficient than foreign banks. In terms of bank size, large banks are found to be more cost efficient but less profit efficient than other sized banks. The results also indicate that foreign banks have on average been operating with higher scale diseconomies than national banks. Moreover, scale diseconomies decline as the assets sizes of both national and foreign banks increase. The main results from our logistic regression are that the strengthening of financial capital is a central element explaining bank efficiency in the GCC region; however, the erosion in loan quality reduces banking sector efficiency. The main policy conclusion from this thesis is that GCC governments need to continue to implement financial reform packages that strengthen banking system soundness, foster banking competition, and also devise incentive schemes to improve managerial efficiency in order that GCC banks are better placed to meet the challenges of greater openness.