AN INVESTIGATION INTO THE DETERMINANTS OF COST EFFICIENCY IN THE JORDANIAN BANKS: AN APPLICATION STOCHASTIC FRONTIER METHOD
Keywords:
Stochastic frontier analysis, Deregulation, Jordanian Banks, cost efficiencyAbstract
This paper aims to measure and evaluate the cost efficiency for 17 Jordanian banks (2 large, 8 medium, 4 small and 3 foreign) for the period 1996-2007 covering the deregulation era, by employing a parametric estimation approach also known as a stochastic frontier analysis (SFA). In addition, this paper analyse the sources of the cost efficiency method developed by Papke and Wooldridge (1996). The empirical result for the cost efficiency are obtained by running an input-oriented SFA model using the computer program, FRONTIER Version 4.1., developed by Coelli (1996). The paper findings suggest that both the domestic and foreign banks have shown over the years of deregulation era slight improvements and this led to improvement in the efficiency of the Jordanian banking sector. In addition, this paper investigates whether ownership structure, size, number of branches and ATM, bad loan and age of the bank significantly affect the cost efficiency levels of Jordanian banks. Results show that differences in ownership structure significantly affect Jordanian banks’ performance in terms of cost efficiency.
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