AN ENVELOPMENT ANALYSIS APPROACH TO MEASURING THE EFFICIENCY AND EFFECTIVENESS OF COMMERCIAL BANKS IN EAST AFRICA

Abstract

The purpose of this paper was to analyse the efficiency, effectiveness, and performance of 63 commercial banks operating in the East African Community States using a two-stage performance evaluation model. This paper is perhaps the first to evaluate the performance of East African commercial banks by considering simultaneously the aspects of efficiency and effectiveness. Using cross-sectional data for the financial years 2006-2011, the technique of data envelopment analysis was used for computing the efficiency and effectiveness scores for individual commercial banks in the East African Community (EAC). The overall performance scores have been derived by taking the product of efficiency and effectiveness scores. The empirical results reveal that high efficiency does not imply high effectiveness in the East African banking industry. A positive and strong correlation between effectiveness and performance measures has been noted. Large banks score better than small banks in efficiency, effectiveness and overall performance.