The impact of financial liberalisation on the efficiency and productivity of the Libyan banking system 1998-2009

• Main Author: Enpaya, Adel Alkaseh A.
• Published: University of the West of Scotland 2014
• Subjects: 332.109612
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.630471

In the early 2000s, the Libyan government, in response to the economic adjustment program of the International Monetary Fund (IMF) and World Bank (WB), undertook a series of steps towards financial liberalisation and deregulation, reducing government control over economic institutions in order to create a favourable environment for improving the performance of the Libyan banking system. This study aims to investigate the impact of financial liberalisation on the efficiency and productivity of the Libyan commercial banks over the period 1998-2009. A two-stage method is employed in order to do so. In the first stage, the Data Envelopment Analysis (DEA) method is employed to estimate the technical efficiency of Libyan commercial banks using two inputs and two outputs. In addition, the Malmquist Productivity Index based on the DEA is used to estimate the changes in productivity of the Libyan banks over the entire period. In the second stage, the Tobit regression model is used to examine the potential determinants of efficiency of the Libyan banking system, and to explain variations in bank efficiency. The findings indicate that, in general, the technical efficiency of the Libyan banks was not high during the period of study. They have great potential to produce the same amount of outputs with fewer inputs than they actually employed. The technical efficiency of the Libyan banks declined during deregulation period due to the failure of management to adopt new environment in Libya and also due to the inability of Libyan bank managers to exploit available resources to produce outputs. A Grand Frontier analysis of efficiency indicates that there was a significant decline in their average technical efficiency, pure technical efficiency and scale efficiency during the liberalisation period. In general, state banks outperformed their counterparts, while the efficiency of large banks and small banks was higher than that of medium sized banks. A weak positive relationship between efficiency measures and size is also observed. Finally, the productivity of the Libyan banking sector slightly improved during liberalisation. The improvement in productivity during financial liberalisation was due to heavy investment in computerisation, new banking technology, information technology and internet banking. This helps to reduce costs and improve banking services. An interesting finding is that regional banks who transformed into private banks achieved higher productivity growth compared to their counterparts, while small banks and large banks achieved the highest productivity progress compared to medium banks.