Efficiency, risk and productivity patterns in South African development finance institutions

Abstract

Like most commercial banks that needs to convert deposit (input) into loans (outputs) efficiently, the cost of bringing about the developmental mandate for the DFIs needs to be kept at the minimum, whilst producing maximum output. Whilst there is a wide literature on a traditional measure of efficiencies from the credit allocation perspective, few or no studies are available in linking the risk incurred by DFIs - due to their operational mandate- to their relative efficiencies and productivity patterns. The paper assessed the relationship between efficiency, risk and productivity patterns, within the DFIs. Principally the main area of interest is understanding the relationship between risks that DFIs are mandated to take and their effect on efficiency levels. The results firstly indicated that operational inefficiencies resulting from inability to allocate resources and cost were the primary source behind the DFIs inefficiencies. Turning to the second objective, the analysis reveals that the nexus between risk and efficiency does not exists for the South African DFIs. The majority of the DFI in SA are government funded to assume a certain risk in an effort to achieve the developmental goal.