An application of Data Envelopment Analysis to study the Technical Efficiency of UAE banks in the pre and post crisis period

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The British University in Dubai (BUiD)
The rapid growth and development of the UAE banking sector over the past decade has seen increased competitiveness, technological advancements, booming economic conditions as well as a global financial meltdown resulting in tighter regulatory norms and increased emphasis on operational efficiency. To this end, the present paper carries out a two stage analysis on 11 local commercial UAE banks, over the period of ‘2003-‘2010. In the first stage, the technical efficiency scores of the sample banks are computed with the help of the output oriented, variable returns to scale, Data Envelopment Analysis technique. The scores so arrived at in the first stage, were used in the second stage of the analysis, where the Tobit censored regression test was used to regress the dependent variables (the efficiency scores) against 4 selected variables, so as to understand whether these variables influence efficiency scores and if so, to what extent. The findings indicated that the UAE banking sector was affected by the financial crisis based on the pre crisis (i.e. ‘2003-‘2008) technical efficiency scores which reflected an ascending trend. Thereafter, a decline of 33.33% in the number of technically efficient banks was observed and it was inferred that DEA as a technique was able to reflect this trend. The results of the second stage analysis showed that the size of a bank, the profitability (in terms of net income) and the market share of each bank positively influenced the technical efficiency scores, where an increase in these independent variables led to improved efficiency scores. On the other hand, total equity (the proxy for bank capitalization) was found to be negatively related to efficiency scores, which meant banks with lower capitalization ratios had better efficiency levels and vice versa.
data envelopment analysis, technical efficiency, UAE banks, financial crisis, United Arab Emirates (UAE), banking sector, commercial banks