An Empirical Study of the Relationship Between Managerial Skill and Technical Efficiency of Commercial Banks in Kenya

Abstract

This study analyses the relationship between technical efficiency of commercial banks in Kenya and managerial skill characteristics namely the level of education, years of experience and frequency of training. The study also examined the substitution possibilities between a manager’s level of education and years of experience in relation to technical efficiency. The hypotheses of the study were that a positive relationship exists between managerial skill characteristics and technical efficiency and that there are substitution possibilities between years of experience and education level.

Utilizing a stochastic production frontier and regression analysis, it was found that there is a positive relationship between technical efficiency and the level of education, years of experience, and frequency of training. The results also indicated that larger bank size, higher capitalisation and greater profitability are associated with higher technical efficiency. The findings did not suggest any substitution possibilities between a manager’s level of education and years of experience in relation to technical efficiency. In light of the results, banks ought to appoint managers with high levels of education and experience and improve through continuous training, the skills of the managers as this leads to higher technical efficiency. These findings are consistent with previous studies that have recognized managerial skill as a major reason why technical efficiency among firms varies (Jones, 1994; Kirkley et al., 1998; Gallacher, 2001; Ugur, 2004; and Bottazzi et al., 2006). The study however does not support previous literature indicating possible substitution between education and years of experience (Vandenberg, 1980; Kirkley et al., 1998; and Imai, 2003).