Cost and Profit Efficiency of Kenyan Banks

Abstract

This study investigates the cost and profit efficiency of Kenyan banks. This study uses published financial information to carry out stochastic frontier analysis, an econometric technique, to determine if there has been any change in the cost and profit efficiency of Kenyan banks from 2003 to 2009, following the introduction of financial sector reforms by the Kenyan government. It also investigates the relationship between cost and profit efficiency, and the relationship between cost and profit efficiency and bank size, foreign or local ownership and listing on the Nairobi stock exchange. The results of the study showed that there were no statistically significant changes in cost or profit efficiency over the period. Larger banks were found to be more cost efficient than smaller banks, and listed banks were more cost efficient than non-listed banks. There was no difference in cost efficiency between foreign and locally owned banks. There were also no differences in profit efficiency between large and small banks, foreign and locally owned banks and listed and non-listed banks.