Analysis of Potential Correlates of Cooperative Banks’ Technical Efficiency

This paper analyzes the technical efficiency of 23 cooperative banks (CBs) in the Philippines applying stochastic frontier analysis (SFA), which takes into account inefficiency effects of potential correlates. The dataset was sourced from the CBs’ published balance sheets provided by the Bangko Sentral ng Pilipinas for the period 2015-2018. Adopting the intermediation approach, input variables are total deposits and fixed assets while the outputs are total loans and other earning assets. Results reveal that total deposits the more significant predictor of the outputs. Conversely, CBs are more efficient in transforming total deposits and fixed assets into other earning assets rather than total loans. The inefficiency effects of consolidation, size and age are highly significant and are not due to random variation. This paper finds that large size CBs with more than 40 years of existence and have not consolidated with other CBs were operating efficiently than younger and medium size CBs that have experienced consolidation. Hence, on the average, CBs without consolidation are better off than CBs with consolidation and a steady flow of total deposits sustained their production of other earning assets. The mean technical efficiency of the cooperative banking sector is 72.2 percent. To attain the optimal efficiency level, the sector needs to increase their outputs by 27.8 percent. The findings suggest that total deposits should be transformed into more loans to conform with the basic mandate of CBs as producers of loans, bank-specific variables should also be given focus as they tend to be sources of inefficiency, and thorough study should be made before pursuing future consolidation as it may not be the best means to enhance efficiency.

Keywords –consolidation, inefficiency effects, stochastic frontier analysis, technical efficiency