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Cooperative Rural Banks: Can They Survive? Evidence Using All Corporative Rural Banks in Sri Lanka

Cooperative rural banks (CRBs) play an important role in providing the rural credit needs offering loans, pawning facilities and savings in rural sector in Sri Lanka. Last few decades even though large number of financial institutions has been increasing in Sri Lanka, CRBs have gained an increasing share of financial assets, which has been particularly helpful for satisfying the growing demand for loans and advances in poor people in the country. However, in general, efficiency of CRBs in Sri Lanka highly criticized today on their performance in poor management of their assets and consequently, the sustainability of these institutions is uncertain. Furthermore, the numbers of failures in formal and informal small financial institutions have been occurred over the past few decades in Sri Lanka, the efficiency of CRBs in Sri Lanka is more concern. This study evaluates the efficiency of CRBs in Sri Lanka by using all CRBs operate in Sri Lanka, 1,193 branches, including North and East provinces. A comparative analysis of the efficiency of CRBs is undertaken by districts by using a Total Factor Productivity measurement, Data envelopment analysis (DEA). It is found that the CRBs in Sri Lanka do not operate efficiently during the period of 2005 to 2010 in providing microcredit activities. This indicates that the survival of CRBs in Sri Lanka in their current form is uncertain in the current financial system. However, the findings suggest that in terms of geographical districts operating, there are significant differences in the efficiency of CRBs. Therefore, the findings of this study contribute to understanding the underlying problems for efficiency in particular all CRBs in Sri Lanka.


Introduction
Under the Cooperative Societies Act 1 Cooperative Rural Bank (CRB) was established in 1964 as a small bank, to provide microcredit facilities to rural communities (Gant, Silva et al., 2002). The main goal of CRBs is to cater to the specific finance needs of those in rural areas and provide stronger institutional support for rural credit. As a formal financial institutions, they have made significant contributions in terms of credit provisioning and savings mobilisation in the last fifty years (Gant, Silva et al., 2002). Specially, for people living in rural Sri Lanka, CRBs have gained an increasing share of financial assets, satisfying the growing demand for loans and advances (Charitonenko and De Silva, 2002).
However, given the collapse of several formal and informal financial institutions in Sri Lanka last ten years (Pramuka Bank, Sakvithi, Golden Key Credit Card Company, for examples) the stakeholders of CRBs, mainly rural people, and the general public justify the importance of CRBs' financial services and the assessment of their financial strength. Furthermore, increasing competition from commercial banks entering the microfinance industry will increase pressures on CRBs to achieve sustainability while remaining financially viable (Abeyaratna, 2007). Therefore, evaluating the efficiency of CRBs in Sri Lanka in this context is vital to build the confidence of stakeholders, the general public and the survival of the institution. Survival and success in competitive markets demand achieving the highest level of efficiency. Further, this would help to identify the areas of inefficiency of the institutions and formulate strategies to improve them.

Objectives of the Study
The main objective of this research is to examine the overall efficiency of CRBs by taking all CRBs operate in Sri Lanka in 2010. A comparative analysis is undertaken by districts to identify the relative levels of the efficiency of CRBs in Sri Lanka with controls for geographic areas of operations. Furthermore, a comparative analysis of the efficiency of CRBs has been made by using a Total Factor efficiency measurement, instead of partial factor efficiency measurements.

1
Cooperative Societies Act no.5 of 1972

An Overview of Cooperative Rural Banks in Sri Lanka
In the early 1960s, the establishment of CRBs under the cooperative movement was the most significant step in developing formal microfinance activities by Sri Lankan government since independence in 1948. Throughout the last fifty years CRBs grew to dominate microfinance activities in Sri Lanka by achieving significant outreach. At the end of 1964 the total number of CRBs in the country was only three and end of 2005 there were 1500 CRBs. It has been gradually increased last ten years and number of branches was 1,933 with all branches at the end of 2010 as shown in Figure 1.   In  Though the number of branches, deposits accounts, loan and advances accounts, deposits and loan and advances have been increased during the last few years, in general, efficiency of CRBs in Sri Lanka are highly criticized today on their performance in poor management of their assets. Consequently, the sustainability of these institutions is uncertain. Furthermore, the numbers of failures in formal and informal small financial institutions have been occurred over the past few decades in Sri Lanka, the efficiency of CRBs in Sri Lanka is more concern in general public. Therefore, it is vital to evaluate comparative study of efficiency among all CRBs in Sri Lanka during this period.

Efficiency Measurements-DEA analysis
Efficiency can be measured on a 'partial' factor or 'total' factor basis (Jayamaha and Mula, 2011 the quantity of one input, whereas total factor productivity (TFP) refers to the change in output owing to changes in the quantity of more than one input. Accordingly, the measurement of partial factor productivity considers only one factor and ignores the impact of changes in all other factors. However, Coelli, Rao and Battese (1998) argued that partial measures provide a misleading indication of overall productivity and efficiency of the firm because they provide productivity and efficiency for only one section of the firm.
Data Envelopment Analysis (DEA) 2 model for constructing a production frontier, and for the measurement of efficiency relative to the constructed formula, is an increasingly popular tool used in the TFP in nonparametric approach. Generally, DEA evaluates the efficiency of a given firm, in a given industry, compared to the best performing firms in that industry.
Efficiency indexes for each firm are determined on the basis of the inputs and outputs of each firm. Such an index is called a DEA score. From these DEA scores efficiency can be measured for a whole organization or a unit within the organization. The evaluation unit is also referred to as a decision-making unit (DMU).
The DEA approach to evaluating productivity and efficiency is further explained in Figure 4.
It presents a sample of six firms in an industry that use two inputs X and Y to produce one output. Based on each firm's usage of inputs, data are plotted in Figure 4. As a large difference in the combination of inputs for obtaining the output of these firms, exists it is very difficult to evaluate their productivity and efficiency by a single score. However, a frontier line can be drawn based the firms closest to the origin. So, a line can be drawn from firms 'E', 'A', 'C' to firm 'D'. This frontier line envelops all the data points and approximates the efficient frontier line.

Figure 4: The efficient frontier in data envelopment analysis
Source: (Coelli, Rao et al. 1998, p.143) It is relatively easy to implement the DEA approach in this example because firms use only two inputs and produce only one output. However, when inputs and outputs are multiple, it becomes complex and it is necessary to use mathematical formula and a computer package.
The basic DEA model presents an efficiency based on the ratio which is the ratio of outputs to inputs.

Efficiency of Cooperative Rural Banks in Sri Lanka
The study is based on all CRBs (1933 branches Table 3.  DMUs in Sri Lanka reported more than .90 scores for efficiency. However, as stated in previous section overall TE scores of mean of the year continuously declining over the study period, the overall mean of each DMU scores suggest that 88% of the DMUs reported less than .90 TE scores. Therefore, another analysis has been made to see whether any regional disparity affects the efficiency of Sri Lankan CRBs. Kruskal-Wallis test has been used to see any regional disparity affects the efficiency and Table 4 presents the Kruskal-Wallis results.

Summary of Efficient CRBs -2005 to 2010
By considering all TE scores and comparing all inputs and outputs in this study the summary of estimated results for efficiency is presented in Table 5. New financial institutions entered the rural finance market in Sri Lanka, other commercial banks diversified their activities to include microfinance services, (CBSL 2006) and internal constraints, such as lack of awareness of best practices in microfinance, weak institutional capacity and a negative perception of the commercialization decision, hamper diversification of activities of CRBs, result in decreasing membership (Charitonenko and De Silva 2002) may have adversely affected CRBs efficiency. Therefore, the findings may convince industry decision makers to establish more comprehensive policy settings for promoting CRBs activities in the Sri Lanka rural financial sector and survival of the institutions.