No.208 The Cost Efficiency of Cambodian Commercial Banks: A Stochastic Frontier Analysis

Regulating a banking sector requires a deep understanding of the industry structure and behavior of banks, and their current market performance. The Cambodian banking sector has rapidly expanded in recent decades, in line with the Country’s sustained high economic growth. However, there are concerns about the performance of Cambodian banks and the country’s banking sector. The problem is that there is a paucity of empirical evidence to clarify the real issues in the banking sector, and this lack of evidence also makes it difficult to formulate effective policy measures to address any potential problems.

In this study we provide empirical evidence on the behavior of Cambodian commercial banks by estimating the industry cost function and their cost efficiencies. Our study covers 34 commercial banks over the period from 2012 to 2015.

We find that average cost efficiency scores range from 0.26 to 0.29 (depending on the output definition) for Cambodian commercial banks, suggesting that if they operated more efficiently they could cut costs by 71% to 74% while keeping the same output level. We also find that the Cambodian banking industry realizes economies of scale. Furthermore, by estimating the determinants of cost efficiency we find that expanding a branch network into local areas is inefficient for bank management. Secondly, holding excessive liquidity is associated with greater inefficiency, but diversification in bank business operations is positively associated with the improved cost efficiency of Cambodian commercial banks.

Keyword: Cambodia, Cost Function, Efficiency, Banking, Stochastic Frontier Analysis