Assessing the Efficiency of Commercial Banks in Sierra Leone: A Data Envelopment Analysis Approach
Abstract
Over the past decades, the Bank of Sierra Leone has implemented several reforms aimed at improving the efficiency of the banking sector. Despite these reforms, the banking sector is plagued by inefficiencies, evidenced by persistently high-interest rate spread and non-performing loans. To this end, this study utilised an output-oriented data envelopment analysis (DEA) technique to evaluate the efficiency of twelve commercial banks in Sierra Leone from 2012 to 2022. The study established that banks in Sierra Leone operate below optimal efficiency, with an average inefficiency score of 52.6%. Furthermore, the study revealed that pure technical inefficiency (41.9%) rather than scale inefficiency (14.8%) was the main driver of the overall inefficiency in the banking sector in Sierra Leone. The study also identified the inputs and output adjustments that the inefficient banks would have to make inorder to achieve efficiency. Finally, the inefficient banks were benchmarked against the most efficient banks to determine the appropriate input-output production mix that the inefficient banks should adopt. The findings from the study suggest that the top management of commercial banks in Sierra Leone should improve on their operational and managerial competencies if they are to operate efficiently. Specifically, banks in Sierra Leone should increase their efficiency and performance by reducing their operating expenses, increasing their deposit mobilisation strategy, and increasing their intermediation efforts.
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