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JAOC
4,2 Predicting change in bank
efficiency in Jordan: a data
envelopment analysis
162
Jamal I. Bdour and Abeer F. Al-khoury
Department of Accounting, Faculty of Economics and Administrative Sciences,
Yarmouk University, Irbid, Jordan
Abstract
Purpose This study aims to investigate the relative efficiency pattern of Jordanian banks during
the period between 1998 and 2004.
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Introduction
The changes in regulatory frameworks, advancements in technology and market
enlargements impose increasing pressures and, therefore, aggravate concerns for
competition and efficiency within a deregulatory industry. The deregulation and
liberalisation of financial market has transformed the banking systems of a large
number of countries over the last two decades. The reforms are sure to have a profound
effect on the development of the banking sector in these countries and their overall
macroeconomic performance. In recent years, the Jordanian commercial banking
industry has undergone numerous changes in laws and regulations for the purpose of
bringing the banking sector operations in line with international standards. After 1993,
Journal of Accounting &
largely de-regulated interest rates and the allocation of credit, liberalized entry into the
Organizational Change sector, and introduced modern prudential regulation and supervision.
Vol. 4 No. 2, 2008
pp. 162-181 Considerable research has emerged to assess relative efficiency estimates within
q Emerald Group Publishing Limited
1832-5912
and across countries (Berger and Humphrey, 1997; Allen and Rai, 1996; Haslem et al.,
DOI 10.1108/18325910810878955 1999; Dietsch and Lozano-Vivas, 2000; Drake, 2001), to predict failure (Barr et al., 1994).
Research also suggests for regulatory and government policy (Bauer et al., 1998) and Bank efficiency
evaluates mergers and acquisitions (Kohers et al., 2000). in Jordan
Perhaps, the most intriguing use of frontier efficiency methods in improving
managerial practices comes from the analysis of an individual financial institution
(e.g. banks). Findings about best and worst practices may be used to rewrite
policies and procedures for banks. In addition, upper management may use frontier
efficiency rankings to determine the banks which need of reform, local management 163
replacement, or closure.
Efficiency studies of banking network mostly use the mathematical programming
techniques of data envelopment analysis (DEA) (Berger and Humphrey, 1997). Most of the
research has been conducted using DEA (Drake, 2001). Such research has mostly been
conducted in developed countries. The shortage of systematic studies in developing and
Middle Eastern countries, where cultural differences and environmental practices may be
of particular importance, adds to the significance of the present research.
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The purpose of this study is to examine the efficiency pattern for the years
1998-2004. However, the study does not investigate the effect of government measures
to liberalize the banking system on the performance of the Jordanian banks performance
between 1998 and 2004, which may be tackled in future research. The present
researchers use the deterministic DEA to obtain the efficiency of Jordanian banking
system. More specifically, the study investigates the following research question:
RQ1. What is the relative efficiency of a Jordanian banking system between 1998
and 2004?
The paper proceeds as follows. The second section covers the background of Jordanian
banks. The third section presents the literature review, while the fourth section
presents the DEA methodology. The data and specification of the relevant variables
are discussed in fifth section. The sixth section is devoted for the results discussion and
the final section closes with the conclusions of the analysis and some recommendations
for further research.
system in 1993 and 1997. The main objective of this programme was to establish a
western-type free market economy and competition. Key among the governments
measures were: removing restrictions on interest rates, reducing government direct
lending, expanding product deregulation, and reducing of restrictions on foreign
exchange transactions. With the announcement of the economic stabilization and
structural adjustment programme in 1980, 1993 and 1997, the macroeconomic situation
in Jordan changed dramatically. The programme aimed to introduce the spirit of a free
market economy and competition. It adopted policies giving priority to economic
growth based on export promotion and to structural reforms including deregulation
and liberalisation of financial markets. The financial reforms in the 1980s and part of
1990s in Jordan were mainly designed to decrease the role of the state and increase the
role of market forces in the operation of the Jordanian banks. The reforms included the
elimination of interest rate ceilings and the reductions in both the reserve and liquidity
requirements and financial taxes. In addition, together with the newly established
Jordanian banks, foreign banks were allowed to operate in Jordan and foreign
exchange trading and capital movements were significantly relaxed (Central Bank of
Jordan, 2005).
However, high-inflation rates were still a major problem in the economy. Following a
decline in the early 1980s came an upward trend which threatened the economic stability
and, in turn, had a negative impact on the growth of financial markets. Chronic inflation,
coupled with political instabilities, made financial reforms incomplete and caused public
sector borrowing to increase. In addition, macroeconomic instabilities accelerated
currency substitution, which decreased the demand for the JD[1], increased interest
rates, and shortened the maturity structure.
Over the past two decades, Jordan has compensated for its poor natural resource
endowments by exporting its surplus labour to the oil exporting countries in the
region. However, the recent worldwide recession and the Gulf War have adversely
affected Jordans economy causing a major decline in income, high inflation, and an
increase in unemployment and poverty. While real GDP is projected to grow at
an annual rate of about 6 per cent for the next several years, Jordans per capita income
in 1994 was only about two-thirds of its 1987 level. Long-term debt in 1999 was a
troublingly high 115 per cent of the GDP. Additional reforms were implemented in
1997 to further liberalize the banking system. Among those were interest rates were
further deregulated, greater autonomy was given to bank managements, increased Bank efficiency
capital adequate requirements, promoted bank mergers and acquisitions induced the in Jordan
inter-bank market, and further liberalisation of foreign exchange transactions and
foreign investment.
A major negative impact on investment, growth, and employment creation occurred
as a result of the strong push by the World Bank for trade liberalisation and the IMF
measures which included high-interest rates that made capital more expensive. 165
Furthermore, the rapid trade liberalisation associated with high-interest rates has
caused an adverse effect on productive efficiency and, thus, Jordan could not satisfy the
high-quality requirements of international markets (Harrigan et al., 2006).
In 1999, rehabilitation of the banking sector was given priority and parliament
approved a long awaited new banking law. The changes in the banking law designated
supervision and operation of the banking sector in line with international standards,
which brought about minimal policy constraints on domestic and financial market
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Literature review
An increasing number of empirical studies have attempted to examine the determinants
of efficiency of bank networking, using either a parametric or a non-parametric
approach. There seems to be a substantial body of research documenting the Turkish
experience (Yildirim, 1999; Denizer et al., 2000; Jackson et al., 1998; Jackson and Fethi,
2000), which the researchers are citing due to proximity and potential similarities in
economic, social, and political structure between Turkey and Jordan.
Other Turkish studies used DEA to measure banking performance efficiency. For
example, Yildirim (1999) analysed policy and performance in the Turkish commercial
banks in response to the financial liberalisation and the macroeconomic instability
between 1988 and 1996. Using four inputs (viz. demand deposits, time deposits, interest
JAOC expenses, and non-interest expenses) and three outputs (viz. loans, interest income, and
4,2 non-interest income), he found no sustained efficiency gains in the liberalized era with
continuing scale inefficiency. The findings also revealed that the less profitable
state-owned banks were more efficient than others. Along the same lines, Denizer et al.
(2000) examined the banking efficiency in pre- and post-liberalisation environments
and the scale effects on efficiency for different Turkish ownership groups between
166 1970 and 1994 using the production and intermediation approaches. Three inputs (viz.
total own resources of the bank, total personnel expenses, and the interests and fees
paid by the bank) and two outputs (viz. total deposits, and income from charges and
commissions collected) were selected for the production stage and used as inputs
(along with non-labour operating expenditure) for the intermediation stage while total
loans and banking related income were used as outputs. The results suggested a
decrease in efficiency and a serious scale problem in Turkish banking in the
post-liberalisation era.
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Using the DEA-based Malmquist Index, Jackson et al. (1998) investigated the
efficiency and productivity changes of a number of Turkish banks between 1992 and
1996 using the value-added method. They used two inputs (viz. the number of
employees and total non-labour operating expenses) and three outputs (viz. total loans,
total demand deposits, and total time deposits). The findings suggested that except
during the financial crisis period (viz. 1993/1994), foreign and private banks were more
efficient than their state counterparts owing to the developments in competition and
technological advancements. Jackson and Fethi (2000) conducted a similar study using
the Tobit model for 1998 to explain the variation in calculated efficiencies by a set of
explanatory variables (i.e. bank size, number of branches, profitability, ownership, and
capital adequacy ratio). The results showed that larger and more profitable banks were
more likely to operate at higher levels of technical efficiency, and that the capital
adequacy ratio had a statistically significant adverse impact on the performance of
banks, which may reflect a risk-return tradeoff in the sector.
Cingi and Tarim (2000) examined the efficiency and productivity change in Turkish
commercial banking using the DEA and DEA-Malmquist total factor productivity
index between 1989 and 1996. Two inputs (viz. total assets and total expenses) and four
outputs (viz. total income, total loans, total deposits, and total non-performing
loans/total loans) were used. The findings revealed that while the four state-owned
banks in the sample were not efficient, the three private holding banks maintained
high-efficiency scores over the study period.
An additional body of research addresses bank performance efficiency in the
European Union market using DEA. For example, Lozano-Vivas et al. (2001) analysed
bank performance using either banking variables alone or together with environmental
factors to standardise the country-specific environmental conditions. Three output
variables (viz. loans, deposits, and other earnings assets) and two input variables (viz.
personnel expenses, and non-interest expenses) were used. Furthermore, environmental
factors (viz. income per capita, salary per capita, population density, and density of
demand) were used to reflect the main economic conditions in which banks carry out
their activities. Not only do the results reveal that advantageous/adverse environmental
conditions are a positive/negative factor for the home banking industry but also that
being technically efficient appears to be a significant deterrence to foreign competition.
Similarly, Halkos and Salamouris (2004) studied the performance of the Greek banking
sector using a sample of 15, 17, and 18 banks for the years 1999, 1998, and 1997, Bank efficiency
respectively. The findings revealed that the larger the size of total assets the higher the in Jordan
efficiency.
Similarly, de Pinho (2001) used accounting data to provide estimates of productive
efficiency in Portuguese banking using a production model in which deposits are
handled as an output. The results suggest evidence for the existence of economies of
scale for the smaller banks and economies of scope between deposits and loans for all 167
but the largest banks. Determinants of individual inefficiency scores were also
presented, as being affected by factors such as size, type of ownership, and age.
The literature has also examined banking performance in other countries. For
example, Drake (2001) examined British banks to investigate relative efficiencies
within the sector and to analyse productivity change in British banking between 1984
and 1995. The results provide important insights into the size-efficiency relationship in
UK banking and offer a perspective on the evolving structure and competitive
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production function (viz. efficient input-output relation) is not known (Sherman and
Gold, 1985).
In this study, DEA methodology, with an intermediation approach and input
minimisation (cost DEA) with CRS, is used as a means to evaluate performance and the
measurement of relative efficiency in the Jordanian banking system.
Measuring the efficiency of any organisation (e.g. a bank, a university, or a
hospital), which uses multiple inputs and generates multiple outputs, is complex and
difficult to compare. DEA calculates the efficiency of a given organisation in a group
relative to the best performing organisation in that group.
It is worth noting that DEA bypasses such difficulties as multiple non-homogeneous
inputs and outputs situations, non-linear or dependent output-input relationships, and
the unavailability of controlled experiments with manipulated input (Charnes et al.,
1994). It does not require a prior specification of the production function. A fundamental
assumption of DEA methodology is that all DMUs in the evaluated field should be
homogenous, otherwise the efficiency scores may reflect some differences due to
environmental rather than inefficiencies reasons (Hass and Murphy, 2003). There are
two way to overcome the homogeniety problem, either by dividing DMUs into
homogenous groups but this requires a large number of DMUs to be included or by
making an adjustment for non-homogeniety (Hass and Murphy, 2003). However, Hass
and Murphy (2003) stated that none of the adjustment mechanisms are clearly superior
to the unadjusted Charnes, Cooper and Rhodes (CCR) model. In addition, not only does
DEA produce efficiency scores but also use data on inputs and outputs from a sample of
units to produce a number of useful sets of information about comparative efficiency
(Hollingsworth and Parkin, 1998).
In this study, the researchers attempted to apply the CCR model with CRS approach
to the Jordanian banking sector.
X
n
uij yij
i1
Max hj 1
X
m
vr xrj
r1
subject to:
X
n
ui yij
i1
#1 j 1; . . . ; k banks; i 1; . . . ; n; ui ; vr $ 0; r 1; . . . ; m
Xm
vr xrj
r1
where hj, efficiency score for jth DMU; yij . 0, measurement of ith value of output n for
bank j; xrj . 0, Measurement of rth value of input m for bank j; ui, vr $ 0, the input and
output weights, j, denotes the DMU being evaluated.
The efficiency score of DMU j is determined by the P ratio of Pthe sum of weighted
outputs to the sum of corresponding weighted inputs: ni1 ui yij = m r1 vr xrj . The linear
programming problem finds the vectors of weights ui, vr that maximise the efficiency
score of the DMU i, subject to the constraint that no unit has an efficiency score greater
than one. Each of the jth DMUs utilises similar inputs to produce similar outputs in
different amounts, which is a characteristic of belonging to the same industry and
using similar technology.
When inefficient units are analysed, efficiency adjustment need be introduced. In
other words, it must be determined what the outputs and inputs of a DMU would be
if that unit were to become efficient. To do so, all the outputs and inputs must be
adjusted rather than considered one at a time. The observed outputs and inputs
are adjusted by subtracting the slack value from the observed outputs and inputs.
Slacks are the amount of additional output that would be expected if the DMU were
efficient as well as how much less of the input an efficient unit would need for the
adjusted output.
JAOC The CCR models
4,2 The primal (envelopment) DEA ratio model can be briefly stated for each bank o
o 1; . . . ; k in the data set as follows:
Minul u;
such that:
170
X
k
u xro 2 xrj lj s2
i ; s2
r $ 0 r 1; . . . ; n;
j1
2
X
k
yij lj yio s
i ; s
i $ 0 i 1; . . . ; m u unconstrained; lj $ 0;
j1
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where the xrj are the r 1, . . . , m inputs and the yij are the i 1, . . . , n outputs for the
j 1, . . . , k banks; u and lj ( j 1, . . . , k) are real scalar-valued mathematical
variables and s2 r and si are input and output primal slack variables, respectively. This
formulation computes radial efficiency measures of input-output productivity from a
ratio (CRS) CCR model (Charnes et al., 1978). The optimal value u o of 0 is called the
radial efficiency of bank o. Radial efficient banks have u o 1 and radial inefficient
hospitals have u o , 1. A bank is DEA-efficient if u o 1 and if no optimal solution has
positive primal slacks.
The corresponding dual (multiplier) model can be stated as:
X
n
Maxu;v hj uij yij ;
i1
such that:
X
m X
n X
m
ui ; vr $ 0; r 1; . . . ; m; vr xrj 1; 2 vr xij ui yrj wj 0; wj $ 0; 3
r1 i1 r1
where vr and ui are the input and output dual multiplier variables and wj ( j 1, . . . , k)
are the dual slacks. Slack analysis will be used in this study to locate the source(s) of
inefficiency and estimate the amounts of efficiency.
The data set consists of major Jordanian banks, which is examined through the
years 1998-2004. The name of the financial institution is not disclosed to insure
confidentiality.
a result of more demand on loans with lower interest rate. In addition, demand deposits
have increased by 24 per cent as a result of the recent rise in money supplies in Jordan
due to salary increases. Thus, citizens have become aware of the value of depositing
their excess money in banks as a safer procedure than keeping it at home. Furthermore,
direct credits have witnessed a slight increase by 5 per cent, probably as a result of
excess cash available in Jordanian banks which increased the ability of these banks to
provide more direct credits to the public at a lower interest rate.
Two inputs show a trend toward a considerable increase over the period under study.
Total assets and net operating expenses have increased by 29 and 23 per cent,
respectively. This increase may have led to equal increase in bank outputs as well. It is
noticeable that a large decrease by 28 per cent in number of employees occurred between
1999 and 2002 followed by an increase during 2003 and 2004. This increase may be due
to the expanding operation in bank activities which led to hire more employees to cope
with the large expansion of operations. Total assets, considered here as an input, was
inflated by the increased amount of capital spending by large banks, which was, in turn,
reflected in poor efficiency performance. This result might be due to performance of
some banks has improved which reflected in poor efficiency performance of other banks.
It is still to be seen if the fall in the years 1999-2002 in the number of employees can be
interpreted as an indication of higher efficiency performance in the bank network.
The general pattern of the inputs and outputs is one of increasing production and
more use of resources. In terms of efficiency, this pattern is hardly considered an
increase because more use of resources has taken place, which may also indicate a fall
in efficiency. All banks had used more resources to produce more outputs and, thus, the
cost of producing these outputs has risen in the last three years of the period under
investigation. The total assets and net operating expenses have risen over time.
At the same time, output indicators have also risen during the same period.
The above observations give an overall picture of the changes in inputs and outputs in
the Jordanian banking sector, but at this stage one cannot be certain whether this
sector has managed to increase or decrease its efficiency over this seven-year period
under study.
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Outputs
Direct credit Mean 442,988,049 440,848,351 450,423,664 476,061,610 465,637,752 574,544,052 679,505,668.2
SD 3,429,159,643 3,562,537,051 3,574,505,492 3,633,595,404 3,594,432,027 1,565,237,938 1,791,741,923
Net operational income Mean 33,032,079 32,980,269 37,634,887 41,374,602 40,650,263 51,273,441 59,311,478.67
SD 257,419,810 243,713,317 271,494,400 286,592,972 284,167,311 124,326,043 146,928,347.5
Demand deposits Mean 851,713,224 918,931,223 978,398,472 1,044,227,807 1,052,799,357 967,637,993 1,696,464,171
SD 7,295,617,153 7,839,992,061 8,075,293,757 8,523,888,294 8,421,435,770 2,363,918,234 3,629,985,375
Inputs
Number of employees Mean 926 698 647 656 664 907 986
Total assets Mean 1,010,566,199 1,086,110,131 1,205,168,090 1,286,568,825 1,302,627,220 1,438,818,702 1,660,951,644
SD 8,206,791,763 8,816,297,519 9,650,641,610 10,108,507,616 10,181,922,091 3,850,242,593 4,282,564,460
Net operating expenses Mean 23,242,617 23,881,192 26,137,720 28,606,623 28,684,436 34,522,142 36,332,945
SD 155,308,661 145,877,031 160,638,527 176,898,278 177,399,699 76,042,630 79,864,020.51
Note: All numbers are in JDs (1JD: $0.71) except for number of employees
in Jordan
Bank efficiency
in DEA
Table II.
JAOC Results and discussion
4,2 This section presents the results and discussion of the analysis using the DEA model.
The performance of Jordanian banks is evaluated using DEA as a non-parametric
technique first proposed by Charnes et al. (1978, p. 86) to measure efficiency
performance for banks under the assumption of CRS. Input minimisation with CRS is
used to calculate relative efficiency for each bank during the time period under study.
174 The Frontier Analyst Programme (FAP) was used to allow for making distinctions
between two types of input and output factors. The first type, controllable inputs and
outputs, refers to those under direct management control, whereas the second type
refers to those inputs and outputs which cannot be placed under direct management
control. The first type is considered more important since it is possible for the
management of relatively inefficient DMUs to attempt to achieve the identified targets
which enable them to become efficient. However, the second type (e.g. direct credits)
may be indirectly affected by management in the long run. Furthermore, FAP offers
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information about the banks which serve as frontier units (i.e. those which have
contributed to their own and other banks reference technology). Tambour (1997)
considered this as equivalent to an intensity variable greater than zero in DEA models.
Table III shows annual efficiency scores assuming CRS during the period 1999-2004
using the CCR model. The assumptions being made here are that all DMUs must
minimise the inputs they use to produce the most possible outputs. The increased
competition within the bank system places pressure on these banks to utilise their
resources more efficiently to produce banking services.
Table III draws a picture of relative efficiency for the banks under study during the
time period 1998-2004. It shows that in the CCR model there is an increase in bank
efficiency in all years except 2003 and 2004 where a decrease in bank efficiency was
evident for several banks in the sample (viz. 1, 2, 3, 4, 6, 10, and 17). In 1998, there were
efficiency frontier instead of at its current location, would have needed only 53.09 per cent
of the inputs currently being used. However, as shown in Table III, the situation changed
in subsequent years. The number of efficient banks rose rapidly leading to an expedient
catch-up with the normal level of efficiency, resulting in a much higher average
efficiency of 96.36, 98.77, 98.38 and 99.03 per cent in 1999, 2000, 2001 and 2002,
respectively.
In year 2004, Bank 15 has the smallest efficiency score of 24.03 per cent, which may
attributed to documented theft and embezzlement by the managerial staff of this bank.
Two banks (viz. 7 and 8) performed better than their counterparts, which may be
attributed to the fact that these banks are not only funded by the government but also
grant loans on a wider scale than other banks.
In terms of particular inputs, the DEA analysis shows that the most significant
causes of inefficiency among the sample banks are the number of employees and total
assets (Table II). Over the period under study many of the inefficient banks had excess
labour and excessive cost of fixed assets.
These findings may suggest that, in spite of the process of equalisation in the
Jordanian banking industry, there still exist a number of banks with a relatively high
proportion of non-performing loans and low level of efficiency for which it might
become difficult to withstand challenges in an increasingly competitive environment.
This conclusion is readily supported by the fact that some efficient banks between
1999 and 2002 became inefficient with a noticeable low score in 2003 and 2004.
4,2
176
JAOC
Table IV.
of input variables
for inefficient banks,
Slacks/excess analysis
reduced its cost of assets by 28.18 per cent, operating expenses by 25.20 per cent, and
number of employees by 15.
Table IV suggests that if the behaviour of inefficient banks is individually
compared, one can notice that some of the banks have responded to the new system
where the Jordanian Government took measures to liberalize the banking system in
1993 and 1997. These measures aimed at establishing a western-type free market
economy and competition. Despite the fact that several banks had responded between
1999 and 2002 to the government initiative, this response had been transient and
short-lived, which resulted in dwindling efficiency in 2003 and 2004.
The DEA also produces the output slacks (deficient/surplus) for the relatively
inefficient banks. Table V presents the potential increase in the production of outputs
for the relative inefficient banks during 1998 and 2004. The results pertain to a
reduction in the use of both capital and labour inputs or the potential increase in the
production of bank outputs. This evident of the consciousness of the banking industry
toward the challenges that are facing them in the near future. The bank management
should continue making decisions about reallocating the resources within their banks
to increase the performance efficiency and in order to sustain long-term growth and
profitability.
To illustrate, consider Bank 3 used in the earlier example. In 2003, if Bank 3 was
efficient as its reference set banks, it could have increased its direct credit by
60.44 per cent. The efficiency score for this bank rose from 38.72 per cent in 1998 to
93.85, 97.97, 99.83 and 100 per cent in 1999, 2000, 2001, and 2002, respectively, after
which it dropped to 71.82 and 56.32 in 2003 and 2004, respectively. It is evident that
Bank 3 should produce more of the outputs as its reference set with regards to direct
credit and operating income.
Conclusion
To summarise, banks have responded differently to the new measures taken by the
Jordanian Government. Some banks, for instance, have reduced some of their input
usage to produce more output. However, it is difficult at this early stage to reach firm
conclusions about the effect of the reform measures on bank efficiency, because these
measures have not been enforced for a long time. Furthermore, it is evident that not
only assets utilisation but also the labour factor was the problem that affected banks
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4,2
178
JAOC
Table V.
inefficient banks,
output variables for
1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2 9 35 0 14 0 0 0 8 0 7 0 0 21 0 0 25.83 0 0 11.49 0 11.49
3 33 3 0 45 0 0 14 0 0 85 0 0 0 0 0 60.44 0 0 0 0 0
4 48 89 0 45 41 0 9 9 0 57 55 0 25 0 0 22.18 0 0 0 0 0
5 109 23.8 0 74 12.9 0 14.97 157 0 25.05 32.3 0 37.18 20.9 0 0 0 0 0 0 0
6 35 33 0 51 22 0 43 0 0 34 0 0 32 0 0 51.80 0 0 3.75 0 3.75
7 31 210 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
8 0 66.78 24 0 12.15 8 5 63.65 0 0 55.78 61 0 0 0 0 2476 0 0 0 0
9 0 12.1 11.1 23.7 30 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
10 0 65 11 0 70 1 0 19.7 9 0 9.7 18 0 9 0 0 162 13.6 0 73.25 0
11 0 0 0 0 0 0 0 0 0 22 0 43 26 0 31 0 0 0 66.80 0 66.80
12 0 8.1 11.14 0 39 54 0 52 0 24 0 40 11 0 0 0 0 0 0 0 0
13 30 65 0 48 45 0 6 0 0 20 21 0 19 0 0 0 0 0 0 0 0
14 1 80 0 0 60 0 0 18 0 3 0 0 6 0 0 4.82 0 0 0 0 0
15 0 57 14 0 75 20 0 117 42 0 35 0 5 32 0 0 0 0 0 0 0
16 49 119 0 59 36 0 18 0 0 36 0 0 39 0 0 57.66 0 0 6.26 0 6.26
17 6 19 0 37 18 0 0 69 21 0 21 17 0 0 0 0 0 0 0 0 0
Notes: DC direct credit; DD demand deposit; OI operating income
efficiency performance and had an adverse effect on bank efficiency, especially in Bank efficiency
regards to the number of employees. in Jordan
The slack analysis of the inputs/outputs was explored. It was noticed that some
banks with excess capital inputs appeared as inefficient compared with their reference
set. If the behaviour of inefficient banks is compared individually, one can notice that
some of the banks have decreased their capital and labour inputs while others have
increased them. This may be taken to imply that the banks have responded differently 179
to the new system and that the government initiative of reforming the banking sector
has not yet had the expected impact on Jordanian bank efficiency. Furthermore, it is
evident that both assets utilisation and the labour factor had an adverse effect on bank
efficiency, especially in regards to the number of employees. The unique slacks for the
inefficient banks provide management with marginal values relative an efficient
frontier that can assist management in locating resources over the usual verity of
income banks activities.
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Future research could be done measuring the relative efficiency for all Jordanian bank
branches. In addition, efficiency and productivity changes over the periods covering the
periods before and after government reform of the banking sector to identify the impact
of this reform on bank efficiency performance. The fact that the government reform
implementation process is not yet complete may have cast a further limitation.
A longitudinal study covering a longer span as well as a wider scope of implementation
to build solid grounds for understanding the effect and the consequences of the
government initiative is certainly worth conducting.
Note
1. The average currency exchange rate of the JD against US dollars was 0.71 in 2006.
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Further reading
Central Bank of Jordan (2002), Annual Report, Ministry of Finance, Amman.
Central Bank of Jordan (2004), Annual Report, Ministry of Finance, Amman.
Sathye, M. (2001), X-efficiency in Australian banking: an empirical investigation, Journal of
Banking & Finance, Vol. 25, pp. 613-30.
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Corresponding author
Jamal I. Bdour can be contacted at: jbdour@yu.edu.jo