Evaluating the contribution of bank-specific variables in the cost efficiency of the Jordanian banks

This paper examines the cost efficiency of seventeen Jordanian banks during the period of financial deregulation, 1996-2007. This paper follows a two-stage approach. In the first stage, cost efficiency scores are computed using an input-oriented data envelopment analysis (DEA). At the second stage, cost efficiency scores are regressed on a set of potential explanatory variables in a logit model. While the cost efficiency scores show a declining trend during the early and middle phase of deregulation, they show large improvements in the final phase of financial deregulation. Over the entire sample period, cost efficiency has increased at the rate of 1.55% per annum; the improvement in allocative efficiency has contributed about 60% of this. In this sample I find that bank size, loan to deposit ratio and good management practises positively affects banks cost efficiency and return on equity and number of bank branches negatively affect bank cost efficiency.