Efficiency of Commercial Banks in Rwanda

Abstract

Banking sector reforms and policies in developing economies have had limited effect on financial development. It is argued that knowledge about banks' efficiency helps to inform government policy by providing an assessment of the effects of their policies on banks' performance and development. This study examines the technical and cost efficiency of commercial banks in Rwanda and identifies the factors that influence such efficiencies. The study uses panel data collected on five commercial hanks in Rwanda for a period of six years. It employs Data Envelopment Analysis and Stochastic Frontier Analysis and makes use of to hit regression model to identify the determining factors Consistent with some other studies on African economies, efficiency is found to be around 70% Factor like net income is found to have positive effects on technical efficiency whereas hank size and loans have negative effects on cost inefficiency. Technology was also found to have contributed immensely in increased efficiency in Rwandan commercial bunks. Arising from these findings, we suggest that integration and expansion of technologies should be enhanced throughout the country. Loans should also be directed to more productive investments. xi