An Application of SFA and DEA in the Albanian Banking Sector

Abstract

Banking sector is the main financial sector in developing countries. Due to its significant role in the economy of the entire country, analysis should be done in order to see its performance. This thesis aims to provide information about the efficiency of the main banks operating in the Albanian banking sector during the period 2006-2014. The literature suggests two different methods to measure the efficiency of banks; a non-parametric approach (mathematical method), named DEA-data envelopment analysis and a parametric approach (econometric method) called SFA-stochastic frontier analysis. The previous studies and research done for the Albanian banking system use one of the methods mentioned above. While, this thesis uses both methods DEA and SFA and also compares the obtained results for each method in order to verify the robustness of outcomes. Using DEA method we measured the technical efficiency while, using SFA we estimated the cost and technical efficiency of the main banks. The results show low scores for cost efficiency and high score for technical efficiency. The most important factors that have a significant role in the efficiency of the Albanian banking sector are: total liabilities, deposits and assets. Moreover, Malmquist productivity index is used to measure the importance of technological change on the efficiency of banks between two periods.