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Banking efficiency in the Gulf Cooperation Council countries: an empirical analysis using data envelopment analysis approach


Measurement and analysis of banking efficiency has received increasing attention in applied economics in recent years due to the rapid globalization of the financial industry and consequently, increasing competitiveness in international financial markets. Efficiency in a general term in economics describes how well a system performs in generating the maximum output for given inputs. Efficiency in banking industry terms is measured as the difference between the bank's position and its best production frontier. There are two main techniques that are used to evaluate banking efficiency, parametric methods and non parametric methods. The debate on which approach is more convenient for analyzing the efficiency of the banking industry is still open and has been the subject of many applied works (Luciano and Regis 2007).
This study analyzed the technical efficiency of the banking sector in the six Gulf Cooperation Council (GCC) countries during the period from 2000 until 2007. The two-stage approach is applied as suggested by Coelli, Prasada, and Battese (1998). A nonparametric data envelopment analysis (DEA) is employed to estimate banking efficiency in 50 GCC banks in the first stage, with the assumption of variable return to scale (VRS). In the second stage, the Tobit regression model is used to regress the efficiency level obtained from the first stage on factors that could influence the efficiency score.
The finding of the first stage indicated a progress in average efficiency scores for the banking sector in GCC countries during the period of study. In addition, the result showed that the most efficient banks to be in Qatar, followed by banks in Bahrain and the UAE.
The result of the second stage showed that there is a positive relationship between efficiency scores and profitability level. In addition, the results suggested that Islamic banks were associated with higher efficiency scores.


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banking efficiency
data envelopment analysis
Gulf Cooperation Council
data envelopment analysis


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