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The Macroeconomic Determinants of Banking Efficiency: An Empirical Analysis of South Africa Against the Rest of the World

The efficiency of a nation’s banking industry is a critical factor in the quest to realize economic growth and prosperity for its citizens. This study identifies a host of macroeconomic factors which have been shown to have a strong causal link with the efficient operation of a given banking industry. The efficiency of the South African banking industry is found to be lagging behind most of the twenty representative countries, notwithstanding the way one classifies efficiency. Only among some nations from the South American and Eastern European regions is South Africa’s banking industry efficiency profile comparable.The increase in the size of skilled and available work force, the growth in the size of real spendable per capita GDP, the wide availability of technology and computers, all positively increase the efficient operation of a banking industry. The erosion of an economy’s currency has a negative effect on efficiency but this is not found to be significant across all efficiency measures. The findings point to significant drivers, that if found to be lacking, are likely to indicate a climate of inefficiency. Finally we use Data Envelopment Analysis (DEA) to measure the efficiency of Decision Making Units (DMU’s), in this case, individual banks. However, unlike other studies, we use it as a robustness check of the previous empirical results. These two distinct methods yield near identical results. We conclude that the major causes of inefficiency seem to be structural; the concentrated ownership of the sector, interlocking directorships on bank boards and the oligopolistic nature of the industry mean that South Africa’s customers are paying too high a price for intermediary services.