The Cost Efficiency of Cambodian Commercial Banks: A Stochastic Frontier Analysis
In recent decades, the Cambodian banking sector has rapidly expanded in line with the country’s sustained high levels of economic growth. However, concerns have emerged about the performance of banks and the banking sector of the country. Moreover, the paucity in empirical evidence for elucidating the real issues in the banking sector renders difficult the formulation of effective policy measures to address potential problems.
This study provides empirical evidence by estimating the cost function and efficiencies of 34 commercial banks from 2012 to 2015. The result demonstrates that the average cost efficiency scores are 0.60 when measuring bank outputs as loan and deposit amounts and 0.77 when measuring bank outputs as interest and non-interest income. This finding suggests that given an efficient operation, banks could reduce costs by 40% and 23% in fund mobilization and profit making, respectively, and maintain the output level at the same time. The study reveals that Cambodian banks have undergone improvement in efficiency scores over the said period for both aspects of banking activities. Furthermore, expanding a branch network into rural areas is inefficient for bank management, whereas holding excessive liquidity is associated with high levels of efficiency. However, diversification in bank business operations is negatively associated with the cost efficiency of Cambodian commercial banks.
This study forms part of a research project entitled “Empirical Study on the Promotion of Home Currency in Cambodia,” which was conducted by the JICA Ogata Sadako Research Institute for Peace and Development. It was published online by the Singapore Economic Review.