Lindita VARESI

The 2015 WEI International Academic Conference Proceedings
Athens, Greece
MEASURING THE PRODUCTIVITY OF A MAINLY

FOREIGN OWNED BANKING SECTOR USING NONPARAMETRIC APPROACH; CASE OF ALBANIA
Lindita VARESI PhD
Banka NBG Albania S.A, NBG Group
University Aleksander Moisiu Durres, Albania
Abstract
The reformation of the Albanian banking sector came as necessity to support social and economic transformations
occurred since the year 1990 and onwards. Given that the banking sector occupies 90.3% of financial system total
assets, with an intermediary level at 99.3% by the end of year 2013 (Bank of Albania, FSR, 2014 H1, p.11) and
considering that 90% of total assets of this sector belong to subsidiaries of foreign banks operating in the country,
assessing the performance of this sector in terms of productivity and efficiency remains important for the stability
and progress of the Albanian economy in general. Sample of this study are the sixteen banks constituting the
Albanian banking industry, thirteen of them are totally foreign owned, two are joint ventures and one is completely
owned by nationals. Each bank under study is considered as a Decision Making Unit (DMU). The paper examines
the sector, gives evidences, evaluates the productivity and identifies changes in the productivity of three groups of
banks as classified: Albanian, Greek and Other Foreign Owned during the period 2008-2013 estimated using Data
Envelopment Analysis and Malmquist Productivity Index. Based on results, the domestic banks have an average
increase in total factor productivity index in contrary with the foreign owned as they have been less affected by
fluctuations of the international markets and the financial instability of the region and Euro Zone during the studied
period. The productivity growth is not proportional to the banks size. Small and medium sized banks resulted to be
more productive than the large ones.
Keywords: developing economy, banking sector, foreign ownership, productivity, DEA Malmquist Index
JEL Classification: G21, C14, C61, C67
1.
INTRODUCTION
1.1 Reasons for Studying the Albanian Banking Sector and its Performance
The presented paper is focused on evaluating the Albanian banking sector productivity during 2008-2013
considering the financial difficulties and crisis suffered from the Western Balkans and world economies during this
period. The financial sector of Albania, as other developing economies, has experienced transition, deep reforms,
transformations and progress. The bank oriented structure and the majority of this segment in the financial sector of
Albanian economy, increases the interest for assessing productivity, evidencing and analyzing changes intending
improvement, welfare and progress.
Actually, the banking sector is characterized from concentration and dominated from foreign-owned banks (IMF
Country Report, 2014, p.7). Referring to the same report, banks represent more than 90% of financial system total
assets. Five of the sixteen banks operating in the country possess of total assets and deposits of the financial
system and 90% of the banking sector total assets belong to the foreign banks subsidiaries operating in Albania.
Almost 81% of the Albanian banking sector is foreign owned. These affiliates belong to countries as Austria,
Turkey, Greece, Italy, France, Germany, Bulgaria, Malaysia, Saudi Arabia and Kuwait.
The West East Institute
37
Athens, Greece
Table 1: The Albanian Banking Sector by Ownership

OWNERSHIP
NR.
1
1- Albanian
Albanian &
Ownership
2Foreign
.
2
.
3
.
4
Greek Ownership Banks

Operating in Albania
.
5
.
6
Italian Ownership
Banks Operating in
Albania
7
.
8
.
BANKS OPERATING IN
ALBANIA
FOREIGN
(in %)
% of
TA
By
C&O*
Credins Bank
8.38%
Socit Gnrale Bank Albania
89
5.31%
A&F
Union Bank (Albania)
13
2.41%
A&F
Alpha Bank Albania
100
5.89%
100
3.32%
100
7.39%
100
10.95%
100
1.58%
National Bank of Greece (Tirana

Branch)
Tirana Bank/(Part of Piraeus Bank)
Intesa Sanpaolo Bank Albania
Veneto Banka/Italian Development
Bank
Other
9
.
1
0.
1
1.
1
Foreign
Ownership Banks
2.
1
3.
1
4.
1
5.
National Commercial Bank
100
21.41%
Credit Bank of Albania
100
0.17%
First Investment Bank, Albania S.A
100
1.16%
International Commercial Bank
100
0.66%
Credit Agricol
100
2.66%
Procredit Bank
100
3.24%
Raiffeisen Bank, Albania
100
25.00%
1
United Bank of Albania
100
0.50%
F
6
Source: IMF Country Report No.14/79, Albania FSSA, March 2014 p.32
*Note: C&O Capital & Ownership; A Albanian, A&F Albanian & Foreign, G Greek, I Italian, F
Other
Foreign Countries
Other segments of financial sector in Albania are the Insurance Companies, Pension Funds, Investment Funds,
Savings and Credit Associations, Unions and other financial institutions.
Table 2: List of Entities Licensed from the Bank of Albania (in number)
YEAR
2007
2008
2009
2010
2011
Banks and branches of foreign banks
18
16
16
16
16
Non-bank financial entities
6
7
13
17
19
Foreign Exchange Bureaus
112
189
221
284
301
2012
16
21
322
2013
16
21
333
38

Savings-Loan Association
Unions of Savings-Loan Associations
Source: Bank of Albania
130
2
133
2
135
2
126
2
Athens, Greece
126
2
126
2
12
2
In case of vulnerabilities, the impact of these segments in the financial sector will be insignificant due to the low
weight they have in the sector as total.
Table 3: Share of Financial System Assets to GDP in years (% by entity)
YEAR
2007 2008 2009 2010
Banking System
75.9 76.7 77.5 80.9
Non-Bank Institutions
1.48
1.7
2.2
2.7
SLAs and their unions
1.4
1.5
1.4
Insurance companies
1.36 1.52
Pension Funds
0.01 0.01
Savings & Loan Associations (Investment funds) 0.63 0.71
Source: Bank of Albania
2011
84.7
2.5
1.5
2012
89.6
2.7
1.6
2013
90.5
2.5
1.6
0.01
0.02
1.21
0.03
3.7
Albania faced the financial crisis of 2008 well, although the economy was weak and macroeconomic indicators
worsened. By the end of the year 2013, the economic growth was at 0.7% and the public debt to GDP at 71% (IMF
Country Report, 2014, p.10).
The regional macroeconomic environment, full of uncertainties due to the market fluctuations and the increased
stress, is not favoring any notable progress. Considering the stagnant euro area growth, with an output
construction in Italy, no growth in France and unexpected weakness in Germany in the second quarter of 2014 is
forecasted an increase in recession risks, particularly in euro area than the rest of World group (World
Economic Outlook, IMF, October 2014, p.3, 13).
This study becomes even more important if analyzing the financial soundness indicators of the Albanian banking
sector during crisis compared with the pre-crisis period. The profitability indicators as return on assets (ROA) and
return on equity (ROE) decreased during the period 2008-2013 compared with the pre-crisis period (Varesi, L.,
2014). The ratio of nonperforming loans increased in the year 2013 at 24% from 3.4% by the end of year 2007
(IMF, Country Report, 2014, p.10). A part of loan portfolio is in Euro currency and it bears risks because of low
hedging, maturity mismatches and is difficult to evaluate the exchange risks. Decreases in Foreign Direct
Investments will affect the capacity of Euro liquidity. The sovereign debt, the investment funds and banks are
related. Banks have invested 1/3 to government securities which by their side constitute 2/3 of government debt
(IMF, Country Report, 2014, p.12).
Table 4: Albanian Banking Sector, FSI (Dec.2007 versus average 2008-Sept. 2013/crisis period)
Average
INDICATORS
2007 08 -13
A. Capital Based
Regulatory Capital (% risk-weighted assets)
17.1
16.4
Regulatory Tier 1 Capital (% risk-weighted assets)
16
14.97
Regulatory Capital (% of total assets)
6.2
8.68
Shareholders Equity (% of total assets)
7.6
8.87
Nonperforming loans, net of provisions (% of RC)
11.2
40.47
Nonperforming loans, net of provisions(% Share HLDs Eq)
9.1
40.53
ROE (Annual Basis)
20.7
4.42
Net open position in FX (% of regulatory capital)
1.7
4.18
B. Asset Based
Liquid asset ratio (% of total assets)
49.8
30.23
ROA (Net Income to Average Total Assets/Annual Basis)
1.6
0.38
Non-Performing Loans (gross) (% of total loans)
3.4
16.10
C. Income and Expense Based
I/D
39
Athens, Greece
Interest Margin to Gross Income

92.7
128.57
Interest Expenses to Gross Income
58.5
83.78
D. Other Indicators
Customer deposits (as % of total, non-interbank loans)
215.5 166.50
Foreign CCY denominated loans to total loans
72.5
68.12
Foreign CCY denominated liabilities to total liabilities
46.9
43.13
E. Other Indicators (Core)
Risk Weighted Assets (% of total assets)
36.4
53.23
Total Loans (% of total assets)
39.4
48.85
Total Loans (% of Share HLDs Eq.)
516.4 552.77
Source: IMF Country Report No.14/79, Albania FSSA, March 2014 and Authors Calculations
The financial problems occurred during 2008-2013 and their consequences in the parent countries of foreign banks
operating in Albania can be source of risks for the stability of the financial system and the economy as a whole.
As a confirmation of the above said, according to the last year stress test, six of sixteen banks, constituting 21% of
total banking sector assets (IMF Country Report, 2014, p.19), resulted unable to face exceeded pressure. The
depreciation of domestic currency can be source of deterioration in loan portfolio quality. The liquidity test showed
that the banking sector cannot afford a massive withdrawal of deposits. The risk of contagion effects exists but is
considered as limited due to the measures taken by the Bank of Albania to convert the branches of foreign banks
into subsidiaries with mandatory capital adequacy ratio and liquidity at required levels.
Despite the problems presented, the banking sector has undergone technological changes due to increased
competition and requirements. The use of information technology and communication tools to further upgraded
techniques to promote banking services and products, facilitating their use and accelerating access to them, is
important for improving the performance of the banking sector.such changes have significantly modified bank
production as per Kurtaran, A., and Murat Ar, L., (2013, p.129).
Referring to Yue, P., (1992) the banking performance assessment and the continuous monitoring of their financial
situation is important for the investors, depositors, owners, managers and regulators.
The paper is divided into sections as follows: the second refers to an overview of the Albanian banking sector
considering it as didactic for other countries that are in their way of transformations and development. The third part
of this paper refers to the productivity analysts and researchers, the importance of their studies, method/s used and
results. In the section four is given a detailed description on methodology used and data selected. The fifth section is
a presentation of findings, evidence of changes in productivity by comparing banks analytically and in groups
according to the classifications made based on the their ownership and size, to result in several conclusions hoping
helpful for improving the banking productivity indicators and encouraging increase as and weak growth in total
factor productivity are coming to the fore and need to be tackle (World Economic Outlook, [IMF], October 2014,
p.1).
1.2 Overview of the Albanian Banking Sector
The Albanian financial system transformations started in 1992 as a necessity to respond to profound social and
political changes in the country. The existing system was not able to support the dynamic developments of the
period. In such conditions, emerged as immediate need the transformation of the financial system and its institutions.
The reforming of banking sector started gradually with the establishment of two bank levels (two tiered) and
continued with the privatization of state owned banks, the liberalization of the sector , the entrance of new and
foreign owned banks in the domestic financial system. Foreign banks activity affected positively the progress of
banking sector and the economic development in general. Their presence during this period, deepened the
intermediary role of the banking sector, increased the competition, improved the quality of services, increased the
range of products etc. The effects on the stability of financial sector are not the same during crisis period as foreign
banks are related to international banking and market. The financial shocks in the parent countries may cause
contagious phenomena and have negative impacts on the economies of countries where their subsidiaries operate.
While the banking sector was gradually developing the financial market of Balkan countries remained
underdeveloped.
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Athens, Greece
The reforms undertaken for improving the functioning and the structure of financial sector needed the establishment
of an appropriate legal system to support their application (Albanian Association Banks [AAB], Annual Report,
2011).
After 90s, Albania as other countries of Western Balkans, adapted new laws in compliance with the standards of
European Union related to the Central Bank independence, banking regulatory system, the financial market
operation etc.
Bulgaria was the first to start changes of the centralized financial system and to present a twotier banking sector in
1987 while Albania the least (Golubovi, S., and Golubovi, N., 2005).
The potentiality of the banking sector in the Albanian financial system increases the necessity of evaluating its
performance and allocating inefficiencies. Any vulnerability of the banking sector will be immediately translated as
instability of the financial system and the economy in general.
Actually, the Albanian banking sector consists of First and Second Level Banks. The First level includes the Bank of
Albania performing the roles and duties of a Central Bank while in the second group are included the sixteen
commercial, private owned banks grouped in: 1) foreign capital ownership (81% of banking sector) 2) joint venture,
foreign and national capital ownership (the remaining of 9%) (Bank of Albania, 2013, p.19).
The Albanian economy is examined/considered because of its specifics and transformations that have occurred. It
has undergone substantial changes from centralized, totally state-owned, into an open, liberalized economy. The
economy has suffered from transition starting from the year 1991 and thereafter. The high poverty, the political
instability and deteriorated macroeconomic indicators were characteristics of the country during this period (Varesi,
L., 2014, p.4, 6/table1). The process was followed by economic reforms for supporting the social and political
perspectives towards democracy and progress. Particular attention was paid to the financial system since the
economic development could not relay on the existing. It needed structural changes and improvements.
The reforms started with the banking sector intending the establishment of a productive and efficient banking
industry, able to perform its basic, intermediary role in the economy. Before and during the transition, the
intermediary function of banking sector was at low levels. The few number of transactions registered and services
provided, the minimum interest rates offered for the deposited amounts, the slow payment system and the payment
delays for more than fifteen days was not encouraging the financial activity. There was no competitiveness due to
the state ownership in property and economy. The low crediting, the lack of reliability/credibility, were typical for
the Albanian banking sector during this period. Considering the above mentioned, the reformation of the banking
sector emerged as immediate need.
The banking system in early nineties consisted in: the State Bank established since January 1945, performing the
tasks of a Central Bank: the monetary policy controlling and the managing of credit according to the state planning
(Cani, Sh., and Haderi, S., (n.d)). The Savings Bank of Albania established later to provide a few transactions and
services to the people as the State bank was dealing with the government and its policies. Being an agricultural
country, it was established the Agrarian Bank for supporting the rural development. Due to the financing of the
existing state economy, for providing payment and other services, the Commercial Bank of Albania was established.
By the end of the year 1992, a two level banking system based on two laws for Bank of Albania and Banking
System in the Republic of Albania was established. The Bank of Albania was authorized as Central Bank while
the Savings Bank, National Commercial Bank and Agrarian Commercial Bank as Second Level.
During the year 1993 and after there was an improvement of macroeconomic indicators (Haderi, S., and Hida, S.,
(n.d)). The economic recovery emerged also the need for reforming and developing the financial market in the
country. It was officially inexistent and the only transactions made were some foreign exchanges made from
unlicensed subjects or individuals.
The economic situation, the increased needs, the deficiencies of the banking sector not responding to the savers
demands, the minimal returns on the money deposited and the lack of possibilities for investing the accumulated
capital due to the state ownership on properties and the economy, led the financial sector in informality. Savers
withdrew their money from banks and invested them in informal market at high interest rates. The lack of
supervision justified with the lack of legal restrictions caused the increased number of informal investors. They
were operating unlicensed and there was no existing legal framework to prevent their activity. Out of this was
created an informal market, where transactions were performed avoiding the presence of banks, the legal frames and
supervision from respective authorities.
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Athens, Greece
Albania is quite a clear example of consequences caused by preventing the intermediary role of the banking sector.
The economic activity of the country during the years 1996-1997 was minimized in pyramidal schemes. The only
result was the economic collapse. It was inevitable despite the repeated notifications/announcements of the Central
Bank, the suggestions of International Monetary Fund and the World Bank. This time the recovery program applied
intended to maintain stability as the citizens lost all their savings and properties, the country was in total disorder,
new political demands emerged and the unemployed rates increased causing an increase in tendency for
immigration.
This time the reforms were focused on restructuring the banking sector as its activity was totally frozen. The
inflation rate had considerably increased. The recovery program consisted in the monetary control, capital inflows,
financial market and financial intermediaries new strict policies. The money could have been invested more
efficiently but the concentration in few hands reduced demand and investments. There was no economic
development but growth due to the increased imports. The macroeconomic growth was explained with the reforms
undertaken in the first stage.
After 1997 and onward, the National Commercial and Agrarian banks as state owned, the Savings Bank from
Raiffeisen Financial Group were privatized and completed in the beginning of 2004.
The first foreign bank entered in the Albanian banking sector was the American Bank of Albania that started
officially its activity in the year 1998. The National Commercial Bank was privatized from Calik Turkish Group.
Today thirteen of sixteen banks operating in the country are foreign owned. During the period 2004-2007, the
Albanian banking sector noticed positive developments and progress, a rapid growth in lending supported by other
financial sources except deposits that was not sufficient to face the increased credit rates (Bank of Albania,
Supervisory Council, 2009). Referring to the same report, the performance of the banking in the year 2008 reflected
the developments in the regional and Euro Zone economies, increased the uncertainties of depositors about the
safety of their savings and concluded in an increase of 2% of total deposits compared with 20% in the year 2007.
The credit growth was decelerated at 35% compared with 48 % in the year 2007. The intermediation activity of the
banking sector constrained. The Albanian banking sector remained well capitalized during the period 2008-2013
despite the extended risks and the low level of banks intermediation during this period.
3. LITERATURE REVIEW
By definition (OECD Manual, 2011, p.124-125):
Efficiency is the level representing the best practice of the production process for both technical and allocative
efficiency.
Full technical efficiency refers to the production process through which the maximum production is
realized using a set of given input and technology.
Full allocative efficiency refers to input and output combinations to minimize costs and maximize profit.
Production refers to any activity, organization or firm that uses inputs to produce outputs.
Production Function refers to maximum output produced using a given number of inputs. The technical efficiency is
related to the frontier of production. It is part of a possible production set including all the combinations of inputs
and outputs, not indispensably efficient.
Productivity change has to do with a combination of technical and allocative efficiency changes effects. Factors
like utilization of capacity and errors in measurement have their impact in the residual, when productivity changes
are measured residually.
Total Factor Productivity or multifactor productivity concerns with determining the contribution of all the factors in
increasing output.
Considering the changing economic environment and its impact in the banking system, has increased the interest of
researchers on measuring productivity and evaluating efficiency.
There are no previous studies on Albanian banking sector productivity. The review of thought will refer to similar
studies in other countries.
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Athens, Greece
Rezitis, N., A, (2006), investigated the Greek Banks productivity growth during the period 1982-1997 using DEA
and Malmquist Index technique. The author also compared the productivity of banks in the sample between the two
periods, 1982-1992 and after 1992 due to the profound changes occurred in this sector. For evaluating the
productivity was considered the intermediary role of banks in economy and the intermediate approach.
There were two outputs employed a) loans and advances and b) investment assets. As inputs were used a) labor b)
capital expenses and c) deposits. Referring to the conclusions, the banking sector growth until the year 1992 was
because of the technical development while its progress after the year 1992 was due to the efficiency improvements.
The author used the Tobit regression model to indicate the positive impact of size in the scale and pure efficiency.
Lyroudi, K., and Angelitis, D., (2006), examined the productivity changes of the recent ten EU members for the six
years period between 1996 and 2002. The Malmquist Index was calculated using DEA method. For the exact
allocation of efficiency, the productivity index was broken into technical and technological change indexes. In this
study, the significance of the relationship between size of banks and the productivity using the value added approach
was investigated. The variables used consisted in three inputs: a) personnel expenses b) other operating expenses c)
total fixed assets and three outputs: a) the total deposits, b) customers loans and c) investments. According to
results, both authors concluded in an insignificant relationship except Latvia case where it resulted positive. Based
on index scores, the trend of productivity change was increased during the period studied.
Daley, J., and Matthews, K., (2009), analyzed the banking sector productivity of Jamaica. The number of banks
sampled was twelve and the method used was DEA and Malmquist Productivity Index. The productivity change for
Jamaican banks was examined for the period 1998-2007. Four models were adapted for measuring productivity
using same inputs and different outputs. The inputs used were: a) operating costs and b) deposits while as outputs in
Model 1: a) total net interest income and b) non interest income. In Model 2: a) gross loans and b) investments were
the two outputs; while in Model 3 there were: a) the gross loans NPL (net) and b) investments. In the fourth model
outputs employed were: a) net loans plus investments and b) non perfuming loans (as bed output). Based on the
conclusions of this study, the foreign banks productivity was increased more than of the domestic owned ones.
Three of banks showed zero increase in productivity and analyzing scores it was noticed a decreased efficiency by
the end of crisis 1998/9. Referring to this study the Jamaican banks were not very productive producers but able to
face failure because of regulatory polices applied. The commercial banks resulted to less productive than the other
type of banks analyzed in the study.
Toci, V., Z., (2010), studied the efficiency and productivity of South-East European countries consisting in Bulgaria,
Croatia, Kosovo and Montenegro during the period 2002-2005. The non-parametric method, DEA was used for
studying the intermediation role of banking sector in the region. Referring to the findings, the banking sector
efficiency of the above mentioned countries, indicated progress for the three groups (size, ownership and country).
Kosovo resulted in less efficient than other countries in the sample. The role of banking sector as intermediary in the
countries studied resulted insignificantly improved in terms of productivity changes because of no technical
progress. Differently from the efficiency, the total factor productivity change resulted higher in Kosovo than in other
countries, indicating that Kosovo is making progress towards the financial intermediation function of banking
industry. According to the author, inefficiencies of the sector sourced from the regulatory policies and measures
taken from the Central Bank aiming its controlling due to the dynamic expansion of the sector.
Kamau W., A.,(2011) studied the productivity of Kenyas banking sector and its intermediation efficiency. The
performance indicators were analyzed by using data from 40 banks operating in Kenya during the period 1997-2009.
The method applied for evaluating efficiency changes was the non-parametric CRS and VRS DEA while for
measuring productivity was used Malmquist Index. According to the findings resulted that the banks were
performing well during the studied period although not at a full efficiency, living place for technological and
operational improvements.
Authors, Ngo, Dang-Thanh, and Ngyen Thi Phuong, L., (2012) studied the productivity of 27 banks operating in
Thai during the period 2007-2010 using DEA and Malmquist Index as method. According to the results, the foreign
owned banks were volatile during the studied period. Some of these banks improved their productivity indicator
while others decreased it. The researchers addressed the deterioration of indicators to the decreased return of scale
indicating reduce of resources due to the enlargement of the sector.
43
Athens, Greece
Keskin-Benli, Y., and Degirmen, S., (2012), measured the productivity of 31 banks operating in Turkey between
2004-2009, a six years time period, by classifying them in three main groups according to the deposits ownership:
a) publicly owned (three banks) b) private owned (10 banks) and c) foreign owned (18 banks). The productivity
indicators were compared for each of thirty one banks and between groups for concluding in the best performance.
Referring to the score analysis, the foreign owned banks resulted to be more productive than the other two groups.
The variables used as inputs consisted in: a) deposits and b) interest expenses while as outputs a) credits and b)
interest incomes. Intermediary was the approach adapted in the study for measuring the productivity and
evidencing productivity changes for the Turkish banks sampled.
Neupane, B., (2013) considered twenty two from thirty two commercial banks operating in Nepal for measuring
productivity and evaluating their efficiency during the 2007/08-2011/12 period. The impact of different factors in
performance indicators was also analyzed in this paper. There was an increase in the productivity change of banks
considered in the sample and it was due to the technical developments rather than improving efficiencies. Some of
indicators like structure, the ratio of loans to assets, NPL loans and assets (logarithm) presented insignificant impact
to the efficiency. In line with the literature, the productivity results to be positively related with efficiency in this
study. Significant indicator affecting performance was the ratio of debt to equity. Banks with lower leverage and
higher risk weighted resulted in more efficiency. The author addresses deficiencies to management and practices
followed and suggest increased interest in monitoring and evaluating efficiency.
Park, J., J., and Baek, J., (2014), both investigated the impact of crisis in the productivity of the banking sector
during the period 2007-2011. The number of banks sampled to measure the productivity of banks operating in
Arkansas, US was thirty and were listed in three groups: a) ten national banks b) the number of state banks was ten
and the third was the group of Arkansas banks. The method employed for evaluating efficiency prior the
productivity was the input oriented, CCR and BCC DEA and the Malmquist Index for measuring the productivity of
each group of banks. Intermediary approach was employed in this study too. According to the findings, the
productivity was increased during crisis period and it is explained by technologic improvements. In this study was
not mentioned the increase of costs for adapting better technology due to the increased competitiveness between
banks during the crisis period. The national banks were more productive than banks of two other groups.
The variables used as inputs in the study were: a) noninterest expenses b) deposits c) stock holders equities and total
debts; and as outputs a) incomes before income tax b) investment securities c) total loans.
Camanho, A.S., and Dyson, R.G., (2006), both developed measures using Malmquist Productivity Index for
identifying different inefficiencies of individual decision making units (DMUs) from those of the whole group. The
performance was evaluated for branches operating in four different regions. The productivity index was used for
measuring productivity changes of one DMU in two time periods. The developed measurement index in the authors
study enabled the possibility of measuring relative performance of groups of DMUs in the same moment,
considering the differences in conditions where they operate. The productivity index was divided in two indexes, the
one for evaluating the performance of branches within the same group and the other for comparison of frontier
productivity under the impact of environmental and managerial specifics. The method developed was presented as
favorable to be used for comparing two DMU groups considering the one as reference. It was proposed an adjusted
index to make possible the comparison of more than two groups of DMUs. It presented some advantages of this
index. A number of anonymous comments were made in drafted paper, reflected in the presented one. The variables
implied as inputs were: a) the number of employees/branch and b) operational costs without including the salary and
other personnel expenses. As outputs are considered a) total deposit b) total loans c) value of off balance sheet items,
in total and d) total number of transactions made by branch.
44

4.
Athens, Greece
DATA AND METHODOLOGY FOR ESTIMATING PRODUCTIIVTY
4.1 Research Topics

i.
ii.
iii.
iv.
How is in terms of productivity, the banking sector of Albania presented during the period 20082013?
Are the foreign owned banks more productive than the domestic owned ones?
Does the productivity depend on the size of the sector?
Are the differences/changes in total factor productivity due to financial difficulties and economic
shocks of 2008-2013 periods?
4.2 Data and methodology

In this study, the data presented refers to the sixteen commercial banks (second level) operating in Albania. For
assessing and evidencing the productivity changes of the Albanian banking sector are used panel data of banks for a
period of six years, 2008-2013. The data are taken from secondary sources, the audited annual reports of each
individual bank published in the respective websites. Referring to Kuiper, Sh., (2009) the secondary sources often
provide information to help define the problem more clearly and to identify elements that should be investigated
(p.275). The financial statements are audited, prepared according to International Financial Reporting Standards and
are reported to the Central Banka of Albania.
Referring to literature, empirically searched, results that the most used method for evaluating banking sector
performance indicators using the non parametric method of Data Envelopment Analysis is the intermediary
approach. According to Sharma, D., et al., (2011) from 88 investigated studies, in 56 of them was used the
intermediary approach to choose variables against 21 using the productivity approach, 15 the value added and 6
other approaches.
The intermediation function of financial sector is important in any economy. Intermediation can be of many forms
beyond the traditional banking (Reserve Bank of Australia [RBA], March 2014). The intermediation role of
banking sector in financial systems consists in: 1) accumulating capital and combining resources b) transforming
assets c) allocating the capital in efficient investments given the risks and managing them properly d) monitoring
and systematic informing of borrowers e) calculating with accuracy based on appropriate legal system and
regulatory framework.
Considering the all above said, the selection of variable in the study will refer to the intermediary role of the sector
focused. As outputs will be considered products and services offered consisting in investments and loans while in
inputs are included labor, capital, deposits, number of branches etc.
4.3 Method used for measuring productivity changes and evaluating efficiency.
The Malmquist DEA method was applied to panel data for measuring the Albanian banking sector total factor
productivity (TFP), technological, technical and scale efficiency change. DEA is commonly used because of its
advantages towards other parametric or non-parametric methods applied for evaluating banking and other sectors
indicators of performance. It does not require a defined functional form of frontier and dependencies or relationship
between inputs and outputs. The only information required is the quantity of variables (inputs & outputs) not their
prices. Another priority of the method is the use of more than one inputs and outputs to enable assessment of
productivity and efficiency of a certain DMU or group of DMUs without having specific requirements on data
included in calculations (Graham, A., 2005). DEA can be used for identifying inefficiencies and their source/s.
According to Charnes, A., et al., (1978), through the method can be identified peers which are efficient DMUs for
each non-efficient DMU that can be used as model for the latter. Referring to Cubbin, J., and Tzanidakis, G., (1998),
the average performance indicators evaluation made using regression models is substituted in DEA with the
optimization model making possible the evaluation of individual DMUs.
Main disadvantage of DEA is that it does not consider error in the efficiency and productivity calculations as a
deterministic method and not a statistical one. Statistical regressions are not applied in DEA. The method is used for
measuring relative efficiency compared with the best practice of the analyzed DMUs. It excludes the possibility of
comparing scores between two studies due to unknown differences between best practices of observed samples.
The results depend from the size of sample and the variables specification. Cook, W., et al., (2014) specifies that
while in statistical regression models the sample size has considerable importance in DEA model is irrelevant. It
must be noticed that the frontier is constructed based on best practice whatever the sample is. In case that we add a
45
Athens, Greece
DMU in an existing group of DMUs taken as sample it simply will be efficient or non-efficient compared with the
best indicator/practice. DEA is constructed based on linear programming and optimization.
The number of DMUs to be used in the sample is discussed from a number of researchers. Referring to Golany, B.,
and Roll, Y., (1989), the number of DMUs sampled must be two times the combination of inputs with outputs.
According to the rule of thumb specified from Banker, R.D., (1989), the number of variables must be max inputs
multiplied by outputs, or three times the inputs multiplied with outputs. such a rule is neither imperative nor does
it have statistical basis (Zhu, J., 2014, p.7). As per Dyson, R.G., et al., (2001), the set of units that will be
evaluated must be homogenous meaning to produce same products, offer same services and operate in the same
business, economic environment. Referring to the author, the range of variables used for measuring performance
indicators must include all the sources used and the products produced between the DMUs evaluated and compared.
As per the researcher, the rule of thumb for the number of DMUs to be taken as sample for more confident results
must be at a minimum two times inputs multiplied with outputs.
In the study presented, the number of DMUs will be equivalent to two times (inputs multiplied by outputs), 16.
Through the Malmquist Index, the efficiency changes are classified into efficiency growth due to changes relative to
the frontier constructed based on best practice and into productivity growth referring to improvements related to
similar frontier.
The total factor productivity can be measured using the Malmquist Index DEA as model. Through this model the
changes in productivity can be dissolved into technical change and technical efficiency change.
Fre, R., et al. (1994), presented the output-oriented Malmquist Index applied for assessing the changes in the
banks productivity considering e given technology S which includes all the possible input output vectors and
transform in any period t = 1,2T inputs xt RN+ into outputs yt RM+. The above mentioned can be presented:
St = (xt, yt): xt produces yt
Technology S in t
where t = 1,2,3..T
(1)
The output distance (D) function can be defined according to Shephard, R.W., (1970) and Fre, R., (1988) at time t
as below:
Dto (xt, yt) = inf
:(xt, yt/) St
where t = 1,2,3..T
(2)
t
The above function presents the maximum proportional output vector extension y using the given inputs x . The Dto
(xt, yt) 1 only if (xt, yt) St. Dto (xt, yt) = 1 only in case that (xt, yt) is in the technology frontier and it happens in a
totally efficient production.
The technical efficiency is defined by Farrell, M.J., (1957) as the maximal proportional contraction of outputs.
The costs must be reduced at equivalent portions. The distance function must be defined considering two time
periods, to and t1.
Dto (xt+1, yt+1) = inf
: (xt+1, yt+1/) St
(3)
t+1
t+1
This function is a presence of maximum output proportional changes needed to make possible the (x , y ) related
to technology S. The total productivity factor as a geometric mean of two Malmquist Indexes can be written as
below:
(4)
The Malmquist indices
and
measure the productivity changes between two periods, t+1 and t related to
technology used in time t+1 and t.
Referring to Fre, R., et al., (1989), the Index calculated as presented in equation (4) can be dissolved as below:
1/2
Mo (xt+1, y t+1, xt, yt) =
(5)
46
Efficiency Change (EFFCH)
Athens, Greece
Technical Change (TECHCH)
Total Factor Productivity Change = Efficiency Change x Technical Change (TFPHC = EFFCH x TECHCH)
Efficiency Change (EFFCH) actually measures how close to the production frontier in t+1 versus the t period are the
operating units. The technical efficiency (TECHCH) presents the shift in frontier because of changes in technology
of production.
Efficiency Change, calculated using constant return to scale, can be further dispersed into Pure Scale Efficiency
Change (PECH) and Scale Efficiency Change (SECH) calculated under variable return to scale.
EFFCH = PECH x SECH and TFPHC = PECH x SECH x TECHCH
(6)
(7)
VRS in (6) and (7) refers to variable return to scale.
D0 (/VRS)
presents the distance function calculated under Variable Return to Scale. The Malmquist Index is
calculated by solving the below distance function problems using linear programming:
,
The distance function
,
is measured:
= max k
(8)
Subject to:
Where m=1,2,M
n=1,2N,
and
where k=1,2,K
In case of banks for example, k=1,2K sampled banks; each bank produces m =1,2,M outputs
n=1,2,N inputs
production.
in t=1,2,T period. The variable
using
presents the extension of each bank employed in
In case of deployment of EFFCH (Efficiency Change) into PECH (pure efficiency and scale efficiency (SECH) must
be calculated in additional two more distance functions:
and
under
VRS technology and the restriction added in equation (8):

Base for calculating Malmquist Index is the technical efficiency. Overall Technical Efficiency is dissolved into pure
and scale technical efficiency where the pure efficiency excludes the scale efficiency.
According to the model and literature improvements in efficiency are not necessarily followed by increased
productivity as due to the two time periods studied the technology changes.
47
Athens, Greece
Variables used for assessing productivity of Albanian banking sector including sixteen banks during the period
2008-2013 are as outputs: 1) loans , 2) interest incomes and the inputs: 1) number of full-time employees 2) total
deposits 3) total assets 4) interest expenses.
5.
EMPIRICAL RESULTS
According to Fre, R., et al., (1994, p.71) , in case that there is no change in two time periods, meaning that xt = xt +
1
and yt = yt+1 than the total factor productivity index indicates no change consisting in the M0 ()= 1. It doesnt
mean that the technical and efficiency changes for each bank operating in the country are equal to one. It is recorded
productivity growth in case that the change in Total Factor Productivity Index is greater than one (TFPCH >1) and
adverse change of performance if less than one. According to the literature the Efficiency Change is decomposed in
pure efficiency and scale efficiency change where EFFCH = PECH x SECH and TFPCH = EFFCH x TECHCH (see
Table 5). If EFFCH and TECHCH indexes result higher than one than it will be translated in technical efficiency
and technology improvements. The declines in technical efficiency because of no progress made in technology,
explains the less than one productivity change in both above mentioned indices.
Referring to the Malmquist Index Summary of Geometric Means (Table 5) the sector in general result not to has
been productive during the 2008-2013 period. The total means for the Malmquist Indexes scored for each bank and
of other components results to be less than one, indicating no improvements.
Among the banks with joint capital (foreign and domestic) or totally domestic owned, Banka Credins S.A must be
the reference for the technical efficiency at one while the Union Bank S.A (13% foreign owned) has a positive
increase of the total factor productivity at 14.8% during the studied period. The TFP progress is as result of an
improvement in technical efficiency at 6% and technological progress at 8.2%. The improvements in the technical
efficiency of Banka Union S.A are as result of expansion in both scale efficiency at 2.5% and pure efficiency at
3.4%. The TFP index for Banka Credins S.A that is totally domestic owned is at 1% and source of this is the
technological progress although at a low percentage (1%).There is not noticed improvement in the TFP index of
Banka Societe Generale Albania (< 1). The technical efficiency is improved during the 2008-2013 period at 0.7%
but it is not followed by any change in technology as the TECHCH index scores 0.992 (less than 1). Considering the
average TFPCH means of joint venture or domestic owned banks, they result with improved productivity during the
period under study (average at 1.052).
Analyzing the three banks with Greek capital and ownership (2nd group, Table 5), between the period 2008 and
2013, during which occurred the deepest financial crisis in decades, extensively transmitted and negatively affected
the economy of these subsidiaries parent country, is concluded that there is no any increase in productivity if
referring to the TFPCH index scores. The average TFP change index for the three Greek banks points 0.936 (< 1).
For Banka NBG Albania S.A, the technical efficiency change indicates 1.000. The bank mentioned above referring
to Malmquist Index Means turns technically efficient but has lagged behind the technological improvements and
further developments to promote productivity growth (TECHCH scores 0.949 < 1). The TFPCH index is also less
than one. The same is presented the situation for the Italian and other foreign banks operating in the country,
technically efficient but without technological developments and productivity growth. Italy is also one of the most
negatively affected by the recent years crisis.
Analyzing the performance of the Greek and Italian banks operating in the Albanian financial sector/ economy,
evidencing changes of the technical efficiency and productivity indexes respectively, we point out that in case of a
mainly foreign owned banking sector any vulnerability in the financial stability of the subsidiaries parent countries
is reflected in their progress as the sector is more exposed in the international financial markets and highly affected
by its fluctuations.
Based on scores for the International Commercial Bank (ICB Financial Group Holding AG /Malaysia registered in
Switzerland) and Raiffeisen Bank (Raiffeisen SEE Region Holding /Austria) are two foreign owned banks that have
an increased productivity according to the TFPCH scores at 1,059 and 1.022 translated in 5.9% and 2.2%
respectively improved productivity. This increase derives totally from technological improvements (at 8.3%) for the
ICB as it has been technically inefficient during the studied period.
48
Athens, Greece
Banka Raiffeisen, results efficient and productive. Its technical efficiency change scores one and the productivity
exceeds one too, indicating a simultaneous work for achieving required levels of performance indicators reflected
also in the net result and financial position of this bank (the biggest in the country referring to its total assets value).
Banks are grouped in small, medium and large according to their size defined from the value of their total assets.
The small size are listed banks with a total assets value up to Euro 200 mill, above this amount up to Euro 500 mill
are considered as medium sized while the remaining, with a total value of assets more than Euro 500 mill are
grouped in the large sized. Referring to the data presented in the table 10, Raiffeisen Bank of Albania, with the
highest total value of assets amounting at Euro 2,149,692,901, have scored a total factor productivity change index
at 1.022 (or 2.2% increase in productivity during the period 2008-2013) while the Union Bank that belongs to the
medium sized banks, has scored a TFPCH index of 1.148 or 14.8% (considerably higher than Raiffeisen Bank).The
International Commercial Bank, listed in the small size group of banks operating in Albania, with a total asset value
of Euro 57,061,341, results with a total factor productivity change index at 1.059 or 5.9% growth in productivity
during the same period. Based on above analysis we conclude that the productivity does not depend on the size of
organization but in better use of sources, increase in efficiency, by improving and developing the existing
technology.
6.
CONCLUSIONS
In the presented study, the productivity of a mainly foreign owned banking sector like Albania for the period 20082013 is evaluated by employing the non-parametric approach of Data Envelopment Analysis and the Malmquist
DEA Index. According to results evidences and analysis, the average mean of total factor productivity change
Index is decreased during the crisis period. Two of three domestic owned banks, and two of the foreign owned ones
(different from Greek and Italian), result to have been productive. The outcomes from this research are in line with
the conclusions of both authors, Madhanagopal, R., and Chandrasekaran, R., (2014) that analyzed 55 commercial
banks operating in the Indian economy, from which 26 public, 20 private and 9 foreign owned during the period
2005-2012 by dividing and comparing them in pre-crisis, during and after crisis and concluded in a declined
technological progress during crisis period even though the Indian financial system was not highly affected by crisis.
It results the same with the Albanian banking sector case analyzed during the crisis period. In contrary, authors like
Dang-Thang, Ngo., and Linh Thi Phuong Ngyen, (2012) analyzing 27 banks operating in Thailand during the 20072010 period concluded in late affects of crisis but their conclusions are in the same line with the presented study
referring to foreign banks productivity fluctuations and in a stability of the domestic owned banks productivity. It is
explained with a number of problems caused by the vulnerabilities of the financial sector of the foreign banks
subsidiaries parent countries. The domestic banks were less affected by the international market crisis and its
fluctuations. The facts explain the results of this study. The average score of total factor productivity change index
of the domestic banks is at 1.052, Greek Banks at 0.936, Italian banks at 0.975 and of other foreign banks at
0.977.The results are also in line with the Liao, Chang-Sheng (2010) research on the productivity of foreign owned
banks. The author analyzed 46 of banks operating in Taiwan during the period 2002-2006 by classifying them in
domestic (27 of them) and foreign owned (the remaining 19). The productivity was evaluated using interest and fee
revenues as outputs, interest expense and non-interest expenses as inputs by employing DEA, Malmquist Index as
technique. Referring to the study conclusions, the Taiwan banks were more productive than the foreign owned ones
as foreign banks are not always the best in emerging countries (p.67) as specified by Sensarama, R., (2006)
Referring to the scores for each group of banks regarding to their size is concluded that banks belonging to medium
and small size classification referring to the total value of its assets, results to be more productive than the banks
classified as large. Referring to the conclusions pointed out from Daley, J., and Matthews, K., (2009) analyzing 12
banks during 1998-2007, using two models of input and output/variable combinations, that the top banks showed no
productivity growth but in contrary with the presented study, the foreign owned banks outperformed the locally
owned banks (p.17).
It will be valuable to re-evaluate the banking sector productivity using other approaches and employing different
variables based on possibilities for collecting the data. Maybe this study will provide more comprehensive view of
the banking sector performance in terms of productivity if conducted for a longer period of time or by comparing
results in different periods of time for example banks productivity in pre-crisis, during and post developments etc
49
Athens, Greece
Table 5: Malmquist Index Summary of Banks Geometric Means

Nr
DMUs
Effch Techch Pech
Sech Tfpch Own.
1
Credins Bank
CRB
1.000
1.010
1.000 1.000 1.010
A
2
Socit Gnrale Albania
SGA
1.007
0.992
1.012 0.995 0.999
A
3
Union Bank (Albania)
UNB
1.060
1.082
1.034 1.025 1.148
A
Mean
1.052
4
Alpha Bank Albania
ALB
0.969
0.961
0.971 0.998 0.931
G
5
Banka NBG Albania S.A
NBG
1.000
0.949
1.000 1.000 0.949
G
6
Tirana Bank /(Part of Piraeus Bank)
TIR
0.970
0.956
0.972 0.998 0.927
G
Mean
0.936
7
Intesa Sanpaolo Bank Albania
ISP
1.000
0.992
1.000 1.000 0.992
I
8
Veneto Banka
VB/IDB
1.000
0.958
1.000 1.000 0.958
I
Mean
0.975
9
National Commercial Bank
BKT
0.951
1.003
0.983 0.967 0.954
F
10
Credit Bank of Albania
CBA
1.000
0.998
1.000 1.000 0.998
F
11
First Investment Bank, Albania
FIB
0.927
1.029
0.936 0.990 0.953
F
12
International Commercial Bank
ICB
0.977
1.083
0.974 1.003 1.059
F
13
Credit Agricole
CA/EMB 1.000
0.940
1.000 1.000 0.940
F
14
Procredit Bank
PCB
0.977
1.002
0.984 0.994 0.980
F
15
Raiffeisen Albania
RZB
1.000
1.022
1.000 1.000 1.022
F
16
United Bank of Albania
UBA
0.883
1.028
0.865 1.021 0.907
F
Mean
0.977
Total Mean
0.982
0.999
0.982 0.999 0.981
Note: DMU Decision Making Units, Effch Technical Efficiency Change, Techch Technological Change,
Pech Pure
Technical Efficiency Change, Sech Scale Efficiency Change, Tfpch Total Factor Productivity Change (TFP).
Min
Max
Figure 1
50

Table 6: Malmquist Index Summary of Banks Annual Means
YEAR
EFFCH
2009/2008
0.988
2010/2009
1.000
2011/2010
0.966
2012/2011
1.011
2013/2012
0.945
Mean
0.982
TECHCH
0.909
1.002
1.028
0.980
1.086
0.999
Athens, Greece
PECH
0.981
1.021
0.975
0.998
0.940
0.982
SECH
1.007
0.980
0.991
1.013
1.006
0.999
TFPCH
0.898
1.003
0.992
0.991
1.027
0.981
Figure 2
Figure 3
Figure 4
51
Table 7: Output Oriented Malmquist DEA

Nr Banks Operating in Albania
DMUs
1 Credins Bank
2 Socit Gnrale Albania
3 Union Bank (Albania)
Mean
4 Alpha Bank Albania
5 National Bank of Greece (Tirana Branch)
6 Tirana Bank (Part of Piraeus Bank)
Mean
7 National Commercial Bank ,Albania
8 Credit Bank of Albania
9 First Investment Bank, Albania
10 Intesa Sanpaolo Bank, Albania
11 International Commercial Bank, Albania
12 Veneto Banka, Albania
13 Credit Agricole, Albania
14 Procredit Bank
15 Raiffeisen Bank, Albania
16 United Bank of Albania
Mean
ABBR.
CRB
SGA
UNB
ALB
NBG
TIR
BKT
CBA
FIB
ISP
ICB
VB/IDB
CA/EMB
PCB
RZB
UBA
crs te
t-1
0.848
0.728
0.908
0.828
0.766
0.839
0.802
0.802
0.701
0.903
0.696
0.857
0.795
0.857
0.912
0.858
0.889
0.450
0.792
rel to tech
T
0.991
0.885
0.821
0.899
0.949
1.000
0.977
0.975
0.866
0.950
0.827
1.000
0.931
1.000
1.000
0.982
0.990
0.574
0.912
Athens, Greece
in yr
t+1
0.832
0.737
0.663
0.744
0.858
0.931
0.900
0.896
0.733
0.859
0.722
0.871
0.813
0.938
1.036
0.876
0.849
0.497
0.819
vrs te
Ownership
0.992
0.895
0.852
0.913
0.955
1.000
0.978
0.977
0.920
1.000
0.871
1.000
0.956
1.000
1.000
0.987
1.000
0.657
0.939
A
A
A
G
G
G
F
F
F
F
F
F
F
F
F
F
Figure 5
52
Athens, Greece
53
Athens, Greece
BIOGRAPHY:
Mrs. Lindita VARESI, MBA, PhD(c) is a banker and simultaneously has worked as lecturer in public and private
Universities of Albania; Current job position: Head of Small Business Lending Credit Risk, Risk Division, Banka
NBG Albania S.A (NBG Group); University Degree in Economics/Political Economy issued from the Faculty of
Economy, University of Tirana, Albania. Master in Business Administration, Finance Accounting and Banking from
Institute Universitare Kurt Bosch (IUKB), Switzerland, 2008/NYUT. Certificate of Comparability from United
Kingdom NARIC, October 21,2010. Actually PhD(c), University of Aleksander Moisiu Durres, Albania. Address
(job): Rr.Durresit, Godina Comfort, Tirana, Albania. Address (personal): Barrikada Str., Tirane 2, Ndertim Vila
9/1/ TR 1714, Tirana, Albania, Tel.: +355 42 265 736, Mob: +355 68 39 31 273, E-mails:
[email protected] and [email protected]
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The 2015 WEI International Academic Conference Proceedings

MEASURING THE PRODUCTIVITY OF A MAINLY

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Table 1: The Albanian Banking Sector by Ownership

Greek Ownership Banks

Socit Gnrale Bank Albania

Union Bank (Albania)

Alpha Bank Albania

National Bank of Greece (Tirana

National Commercial Bank

Credit Bank of Albania

First Investment Bank, Albania S.A

International Commercial Bank

Raiffeisen Bank, Albania

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Interest Margin to Gross Income

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DATA AND METHODOLOGY FOR ESTIMATING PRODUCTIIVTY

4.1 Research Topics

4.2 Data and methodology

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Mo (xt+1, y t+1, xt, yt) =

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Efficiency Change (EFFCH)

Technical Change (TECHCH)

The distance function

in t=1,2,T period. The variable

presents the extension of each bank employed in

VRS technology and the restriction added in equation (8):

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Table 5: Malmquist Index Summary of Banks Geometric Means

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Table 7: Output Oriented Malmquist DEA

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