Are Ecuadorian banks enough technically efficient for growth? A clinical study

Abstract

In this article, we estimate the technical efficiency ratio for a sample of 24 financial institutions in Ecuador over the period 2015–2019. To do so, we first apply a non-parametric method such as the data envelopment analysis (DEA). Under variable returns to scale and output-oriented “Interest Income”, the average technical efficiency for the 24 banks is 84.26% and, under output-oriented “Other Operating Income”, the average technical efficiency is 73.22%. We find that the group of large banks has higher levels of efficiency and that there are still opportunities for improvement in the group of medium and small banks. We also estimate that 80% of Ecuadorian banks need to make potential improvements either by increasing their output or reducing their inputs, such as salary costs, to increase the efficiency. In addition, the growth of the banking sector is crucial to achieve the financial development in Ecuador, being significant the efficiency indices, which show that a 1% increase in banking efficiency could increase its size by USD 605 million. By using the random effects panel data econometric model, we demonstrate that the growth of the banking industry is mostly influenced by the concentration of deposits and taxes.