I.

INTRODUCTION

The objective of this study is to measure and explain the measured

variation in the performance and productive efficiency of Mauritian
commercial banks in the post-financial liberalisation period. A wide
range of financial reforms have been instituted since the 1980s
which included measures such as liberalisation of interest rates,
removal of quantitative controls on credit, lifting of barriers on
competition, privatisation of public financial institutions and
introduction of market-based securities. The major aims of the
reforms have generally been to raise both the level of investment
and the efficiency of its allocation and in addition, to enhance the
provision of financial services to all sectors of the economy. These
reforms were geared towards the liberalisation of the financial
system in order to enhance efficiency in the mobilisation and
allocation of financial resources (Jankee 2001, World Bank 2003).

The main impetus for this study lies on the objectives of

policymakers to increase efficiency in the financial system and
develop Mauritius into a regional financial center. Given the
importance of the banking sector in the Mauritian economy, an
examination of efficiency in the banking sector will provide useful
guidance to policy makers towards understanding and assessing the
process of the banking sector reform. Such a study has been
motivated by a number of factors. First, in contrast to developed
countries, very limited evidence has been obtained on these issues

particularly in the case of developing countries (see Humphrey,

1993, 1997 for an extensive survey). Moreover, a wide range of
methods has been developed, broadly classified under parametric
and non-parametric, to study bank efficiency and productivity
(Bauer et al., 1998; Avikaran, 1999).

Given that no such study has been undertaken for Mauritius, such a
work attempts to extend the literature in various ways. First, an
examination of the impact of financial deregulation on the efficiency
(allocative and technical) and productivity (TFP) of banks would
contribute to the literature on a small and deregulated open economy
in the African region. Moreover, we also incorporate different
objectives of the banking industry in our analysis of efficiency and
productivity. Following Leightner and Lovell (1998), two aspects
are examined. Firstly, we look at banks as profit maximisers and
secondly, as banks pursuing the objectives of the Central Bank in
terms of financial stability and economic performance. We apply the
non-parametric approach Data Envelopment Analysis (DEA) (see
Coelli, 1996), a widely applied technique to estimate efficiency
scores and productivity of banks for the period 1994-2004. These
estimates can be used to compare Mauritius with other countries in
terms of efficiency of the banking system.

The outline of this paper is as follows: in section 2, we give an

overview of the Mauritian banking sector. Section 3 briefly reviews
the literature on issues relating to bank efficiency, productivity and

financial deregulation. Section 4 discusses the Data Envelopment

Analysis (DEA) and the methodology that is used to compute
efficiency and productivity of banks for the period 1994-2004. The
estimated efficiency scores are discussed in section 5. Section 6
concludes the paper and highlights the policy implications.

II.

AN OVERVIEW OF THE MAURITIAN

BANKING SECTOR

Before discussing the efficiency issues, in this section I will discuss

the main features of the Mauritian banking sector (see Bundoo and
Dabee, 1998; Junglee 2001; Jankee 1999; Worldbank 2003).
Mauritius is a small island economy in the Indian Ocean and
inherited a bank-dominated financial system at the time of
independence in 1968. As compared to many developing countries
especially in the African region, the Mauritian financial system was
quite developed with 11 banks. The first set of control has been the
regulation of banks interest rates by monetary authorities
throughout the 1970s until late 1980s. Other repression policies
consisted of the imposition of cash ratio and liquid asset ratio that
were gradually tightened over the years as well as the exchange
control on current and capital transactions. In the mid 1970s, the
monetary authorities tightened their control over the financial
system in an attempt to regulate credit expansion and allocate it to
productive sectors.

In the early 1980s, the control over the overall credit was modified
whereby sectors were categorised into priority and non-priority and
ceilings were imposed respectively on both types of sectors.
Furthermore, banks were individually subject to a certain quantum
of credit depending upon their extent of deposit mobilisation and
credit creation. The early 1980s were marked by the beginning of
the process of gradual liberalisation of the financial system. Controls
over interest rates were gradually lifted. Exchange control on current
transactions was no longer imposed as from mid 1980s. By late
1980s, interest rates were fully liberalised. However, quantitative
controls in the form of reserve requirements and credit ceilings
continued to be imposed. The 1990s were marked by the relaxation
of most of the remaining banking sector controls. Credit ceilings
were gradually abolished and the exchange control act was
suspended by mid 1990s. The cash ratio and liquid asset ratio were
gradually lowered and the liquid asset ratio was brought down to
zero in 1997.

The financial liberalisation programme was also accompanied by

other market-oriented reforms such as a free float exchange rate, the
auctioning of Treasury bills and the setting up of a secondary market
for

government

securities

amongst

others.

Most

recently,

transactions involving the repurchase of bank reserves and foreign

currency swaps have increased enormously. In addition, bank
branches expansion has also contributed largely to the institutional
development of the banking sector. From 32 in the 1970, the number

of bank branches expanded significantly to reach 117 in 1990 and

163 in 2003.

Some other specific details on banking sector

developments are given in the appendix.

III.

OVERVIEW OF LITERATURE

The banking sector has attracted considerable theoretical and

empirical research during the preceding decades. Studies have
involved a number of issues including the role of banks in financial
development, bank efficiency, pricing behaviour of banks and
banking regulation. Prior studies on bank efficiencies concentrated
on estimating cost functions and measuring economies of scale and
scope with the implicit assumption that banks being studied operate
efficiently (Gilbert, 1984). Many researchers who have claimed the
importance of investigating inefficiencies in the banking units have
questioned this assumption. Since then, this issue has led to
considerable research. However, one issue of recent interest has
been the effects of deregulation on the performance of banks (see
Berger, 1993, 1997 for a review). The literature distinguishes two
main types of bank efficiency. The first is operational efficiency as
introduced by Farell (1957) to measure efficiency and the second is
X-efficiency as introduced by Leibenstein (1966) to explain
differences in efficiency between banks. The concept of operational
efficiency is purely technical and can be defined as the product of
technical efficiency and allocative efficiency (see Coelli, 1996).
While technical efficiency tells us how far the bank output is from

the banks isoquant, allocative efficiency captures inefficiencies due

to the fact that the bank has picked up a suboptimal input
combination given input prices.

A number of factors have motivated research on bank efficiency

(Berger et al., 1993, 1997; Hardy et al., 2001). First, there is the
mainstream economic thinking that improving the efficiency of
financial systems is better implemented through deregulatory
measures aiming at increasing bank competition on price, product,
services and territorial rivalry (Smith, 1997; Fry, 1995). However,
empirical evidence on the impact of financial deregulation on bank
efficiency has been mixed. Berger and Humphrey (1997) stated that
the consequences of deregulation might essentially depend on
industry conditions prior to the deregulation process as well as on
the type of deregulation measures implemented. The deregulation on
the asset side of the balance sheets that focused on the liberalisation
of the volume and the interest rates of bank lending resulted in the
improvement of both efficiency and productivity of Norwegian
banks (Berg et al., 1992). Turkish banks had a similarly experience
(Zaim, 1995). But the impact of liberalisation on Indian banks
resulted in varied productivity efficiency depending on the type of
ownership (Battarcharyay et al., 1997).

Berger and Humphrey (1997) undertook a comprehensive survey of

130 studies that apply the parametric and non-parametric frontier
efficiency analysis to financial institutions in 21 countries.

A number of issues had been raised and tested relating to bank

efficiency and financial deregulation. These issues mainly included
the alternative methodologies used to estimate different types of
efficiencies, namely technical efficiency, allocative efficiency, scale
efficiency, pure technical efficiency, cost efficiency and change in
factor productivity (see Coelli, 1996). Moreover, researchers have
also tested empirically the extent to which factors such as market
share, total assets, credit risk, technology and scale of production,
bank branches, ownership and location, quality of bank services and
diversity of banking products, financial deregulation and managerial
objectives determine bank efficiencies.

Das (2002) examined the effects of financial deregulation on risk

and productivity change of public sector banks in India for the
period 1995-2001. They found evidence that capital; nonperforming loans and productivity were entwined, with each
reinforcing and to a certain degree complementing the other. They
also found that higher capital led to a rise in productivity whilst
higher loan growth reduced productivity. Moreover, increased
government ownership tended to increase productivity.

Leightner and Lovell (1998) using the best practice production

frontiers,

constructed

the

Malmquist

growth

indexes

and

productivity indexes for each Thai bank, for 1989-1994,

incorporating two different specifications of the services that the
bank provides, one derived from the objectives of the bank itself and

the other derived from the objectives of the Bank of Thailand. They
found higher productivity growth of banks when the bank objective
of profit-maximisation was pursued as compared with the model
when the Bank of Thailand's objective was achieved.

Laeven (1999) used DEA to estimate the efficiencies of the

commercial banks in Indonesia, Korea, Malaysia, Philippines and
Thailand for the years 1992-1996. They also included risk when
analysing the performance of banks and found that foreign banks
took lower risk as compared with family-owned banks.

Battacharyay et al. (1997) examined productive efficiency of 70

Indian commercial banks during the early stages of the on-going
liberalisation process. They estimated the technical efficiency scores
using DEA and then used stochastic frontier analysis to attribute
variation in the calculated efficiency scores to three sources,
temporal, component, ownership component and random noise
component. They found public owned banks to be the most efficient
followed by foreign banks and privately owned banks. Hardy et al.
(2001) estimated the effects of banking reform on the profitability
and efficiency of the Pakistani banking system. They estimated the
profitability, cost and revenue frontiers to derive measures of
efficiency of the banking system relative to the best available
practice. They found that financial market reform has increased both
revenues and costs but did not increase overall profitability and led
to convergence in efficiency.

Jagtiani and Khantavit (1996) examined the impact of risk-based

capital requirements on bank cost efficiencies in the US banking
industry. They found that the introduction of risk-based capital
requirements led to a significant structural change in the banking
industry both in terms of efficient size and optimal product mixes.
Their results implied that regulations encouraging large banks to
expand production and product mixes resulted in a less efficient
banking industry.

Sathye (2001) empirically investigated the X-efficiency, both

technical and allocative, in Australia. He used the non-parametric
method of DEA to estimate the efficiency scores. He found that
banks in the sample had low levels of efficiency as compared with
the banks in the European countries and in US. Efficiency in
Australia came mainly from the waste of inputs (technical
efficiency) rather than choosing the incorrect input combinations
(allocative efficiency). Moreover, domestic banks were found to be
more efficient than foreign owned banks.

IV.

METHODOLOGY

Overtime, a number of methods have been used to measure the

performance of banks. The use of financial ratios has been criticised
because of its reliance on benchmark ratios (see Yeh 1996). These
benchmarks could be arbitrary and misleading. Further, Sherman
and Gold (1985) noted that financial ratios do not capture the long

term performance and aggregate many aspects of performance such

as operations, marketing and financing. In recent years, there has
been an increasing use of frontier analysis methods to measure bank
performance. In the frontier analysis methods, the institutions that
perform better relative to a particular standard are separated from
those that perform poorly. Applying a non-parametric or parametric
frontier analysis does such separation to firms within the financial
services industry.

The parametric approach includes stochastic frontier analysis, the

free disposal hull, thick frontier and the distribution free approaches,
while the non-parametric approach is the data envelopment analysis
(DEA) (see Molyneux et al., 1996). Furthermore after Charnes et al.
(1978) who coined the term DEA, a large number of papers have
extended and applied the DEA methodology ( Coelli, 1996). In the
present study, we employ the non-parametric method (DEA). This
approach has been used since a lot of recent research has suggested
that the kind of mathematical programming procedure used by DEA
for efficient frontier estimation is comparatively robust (Seiford and
Thrall, 1990.)

IV.1 Data Envelopment Analysis (DEA)

The Data Envelopment Analysis is a linear programming technique
initially developed by Charnes et al. (1978) to evaluate the
efficiency of public sector non-profit organisations (see Molyneux et

10

al., 1996). DEA involves the use of linear programming methods to

construct a non-parametric piecewise frontier over the data so as to
calculate efficiency relative to this frontier. Thus, DEA calculates
the relative efficiency scores of various decision making units
(DMU) in a particular sample. The DMUs can be banks or branches
of banks. The DEA measure compares each of the banks/branches in
that sample with the best practice in the sample. It tells the user
which of the DMUs in the sample are efficient and which are not.

The ability of the DEA to identify possible peers or role models as

well as simple efficiency scores gives it an edge over other methods.
Fried and lovell (1994) have given a list of questions that DEA can
help to answer. Details about the various frontier measurement
techniques are found in the works of Bauer et al. (1989), Bauer
(1990), and Leightner and Lovell (1998) etc. There are a number of
software options for running DEA. This study uses the Software
(DEAP) developed by Coelli (1996) to calculate the technical,
allocative and cost efficiency scores of banks. Methodologically, the
characteristics of DEA can be described through the original model
developed by Charnes, Cooper and Rhodes. Consider N units (each
is called a DMU) that convert I inputs into J outputs, where I can be
larger, equal or smaller than J. To measure efficiency of this
converting process for a DMU, Charles et al. propose the use of the
maximum of a ratio of weighted outputs to weighted inputs for that
unit, subject to the condition that the similar ratios for all other
DMUs be less than or equal to one. That is,

11

Max

e0

0
j

y 0j

0
i

0
i

j 1

(1)

i 1

Subject to
J

0
j

y nj

j 1

1; n 1,..., N ;

0 n
i i

i 1

vi0 , u 0j 0; i 1,..., I ; j 1,..., J .

where

y nj , x nj are positive known outputs and inputs of the nth

DMU and

vi0 , u 0j are the variable weights to be determined by

solving problem (1). The DMU being measured is indicated by the

index 0, which is referred to as the base DMU. The maximum of the
objective function

e 0 given by the problem (1) is the DEA

efficiency score assigned to

DMU 0 . Since every DMU can be

DMU 0 , this optimisation problem is well defined for every DMU.

If the efficiency score e

1 , DMU 0 satisfies the necessary

condition to be DEA efficient; otherwise it is DEA inefficient.

It is difficult to solve problem (1) as stated, because the objective
function is non-linear and fractional. Charnes et al., however,

12

transformed the above non-linear programming problem into a

linear one as follows:
J

Max

h 0 u 0j y 0j

(2)

j 1

Subject to
I

x 1,

0 0
i i

i 1

u
j 1

0
j

y nj vi0 xin 0;
i 1

n 1,..., N ; vi0 ; u 0j ; i 1,..., I ; j 1,... J .

The variables defined in problem (2) are the same as those defined
in problem (1). An arbitrarily small positive number,

is

introduced in problem (2) to ensure that all of the known inputs and
outputs have positive weight values and that the optimal objective
function of the dual problem to problem (2) is not affected by the
values assigned to the dual slack variables in computing the DEA
efficiency score for each DMU. The condition
the base

h 0 1 ensures that

DMU 0 is DEA efficient; otherwise it is DEA inefficient,

with respect to all other DMUs in the test. A complete DEA model
involves the solution of N such problems, each for a base DMU,
yielding N different

(vin , u nj ) weight sets. In each program, the

constraints are held constant while the ratio to be maximised is

13

changed. Finally, these DEA problems are solved in the paper using
the computer software developed by Coelli (1996).

IV.2 Sources and Selection of Inputs and Outputs

The definition and measurement of banks' outputs have been a
matter of long standing debate among researchers. For defining
inputs and output, prior studies in banking literature have followed
three main approaches, namely the production approach, the
intermediation approach and the modern approach (user cost)
(Berger and Humphrey, 1992; Freixas and Rochet, 1997). The first
two approaches apply the traditional microeconomic theory of the
firm to banking and differ only in the specification of banking
activities. The third approach goes one step further and incorporates
some specific activities into the classical theory (Leightner and
Lovell, 1998). In the production approach, banking activities are
described as the production of services to depositors and borrowers.

Traditional production factors such as land, labour and capital are

used as inputs to produce desired outputs. A main problem with this
method is that of measurement of outputs. Researchers have used
the number of accounts and number of operations on these accounts
or the dollar amounts as outputs depending on the availability of
data. Sherman and Gold (1985), Ferrier and Lovell (1990), Fried et
al., (1993), Rosen and Paradi (1997), and Athannasopolous and

14

Giokos (2000) followed this approach. The inputs include the

number of employees and physical capital.

Next, we have the intermediation approach, which is in fact

complementary to the production approach and describes banking
activities as transforming money borrowed from depositors into the
money lent to borrowers. The transformation activity originates
from the different characteristics of deposits and loans. Deposits are
typically divisible, liquid, and risk-free while on the other hand,
loans are indivisible and risky. In this approach inputs are financial
capital, deposits collected and funds borrowed from financial
markets and outputs are measured in terms of the volume of
outstanding loans and investments. This approach has been found to
be more relevant for financial institutions as it is inclusive of interest
expenses, which often account for one half or two thirds of total
costs (Berger and Humphrey, 1997). Barr et al., (1994),
Athannasopolous and Giokos (2000) and Sathye (2001) are some
recent studies using the intermediation approach.

The modern approach has the novelty of integrating risk

management and information processing into the classical theory of
the firm. One of the most innovative parts of this approach is the
introduction of the quality of banks' assets and the probabilities of
banks' failure in the estimation of costs. It can be argued that this
approach is embedded in the previous approaches (Freixas and
Rochet, 1997). The third approach perhaps can best be represented

15

through the ratio-based CAMEL approach. In this approach, capital

adequacy, asset quality, management, earnings and liquidity are
derived from the financial tables of the bank and are used as
variables in the performance analysis (Mercan and Yolaan, 2000).
Some recent works have also tried to use all these methods
complementarily in the analysis of efficiency by incorporating
objectives of the bank as well as the central bank (see Leigthner and
Lovell, 1998; Das, 2002). In this paper, we use an intermediation
approach which considers banks as financial intermediaries and uses
volume of deposits, loans and other variables as inputs and outputs.

V.

ANALYSES OF EFFICIENCY SCORES

Given the price information and considering the behavioural

objective of banks, we have used the cost minimisation DEA
program to measure technical efficiencies, allocative efficiencies
and overall economic (cost) efficiencies. We investigate bank
efficiencies with respect to banks maximising their revenues (model
1) and when banks are pursuing the Central Banks objective
financial soundness and economic performance (model 2).

Bank's Own Objective (model 1)

The inputs used are labour, capital and loanable funds whilst outputs
comprise interest income and non-interest income. Staff costs have
been used as a measure of labour. Capital represents the book value
of premises and fixed assets, net of depreciation. Loanable funds

16

include time and savings deposits and other borrowed funds. The
price of labour has been derived by dividing total staff expenses by
the number of employees of respective banks. A proxy for the price
of capital is derived by dividing the book value of premises and
fixed assets, net of depreciation by operating expenses other than
staff expenses. The sample size consists of 10 banks and is
comparable to other works carried out using DEA. The sample size
exceeds the rule of thumb given by Soteriou and Zenios (1998) and
Dyson et al., (1998) which state that the sample should be larger
than the product of the number of inputs and outputs. According to
Evanoff and Israeillevich (1991), DEA can be used in small
samples. The study has been carried out over the period 1994 to
2004, which represents more or less the post-deregulation period.

The data on inputs and outputs of the 10 banks are not reported here
because of its magnitude. Such data were fed into the program
DEAP. However, table 5 in the appendix gives some summary
statistics of the banking industry over the years. The charge for
doubtful debts has increased from Rs 407 millions in 2002 to attain
Rs 817 millions in 2004. Total advances, interest and non-interest
income as well as the overall expenses of banks have increased over
the years under study.

Then we obtained the different efficiency scores for each bank.

Technical efficiency scores are presented in Table 2, Allocative
efficiency scores are given in Table 3. Moreover, the overall

17

TABLE 2. Technical Efficiency of Banks (Banks Own Objective)

Years

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

MCB

0.823

0.945

0.936

0.812

0.923

0.909

0.873

0.854

0.795

0.926

0.895

Barclays

1.000

1.000

1.000

0.886

1.000

1.000

0.900

0.856

0.954

1.000

1.000

HSBC

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.965

0.897

0.812

Baroda

0.953

0.752

0.877

0.804

0.761

0.888

1.000

0.925

0.859

0.965

0.854

Habib

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.825

0.925

BNPI

1.000

1.000

1.000

1.000

1.000

1.000

0.814

0.825

0.825

0.963

0.915

SBM

0.943

1.000

1.000

1.000

1.000

1.000

1.000

0.985

0.925

0.916

0.856

IOIB

1.000

1.000

1.000

1.000

1.000

0.954

0.935

0.950

0.950

0.960

0.890

SEAB

1.000

1.000

1.000

1.000

0.897

0.857

0.926

0.850

0.820

0.850

0.950

Delphis

0.955

1.000

1.000

1.000

1.000

1.000

0.938

0.940

0.950

0.950

0.960

Mean

0.967

0.970

0.981

0.981

0.958

0.961

0.940

0.960

0.950

0.940

0.930

Source: Computed.

18

TABLE 3. Allocative Efficiency of Banks (Banks Own Objective)

Years

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

MCB

0.857

0.803

0.592

0.899

0.570

0.821

0.826

0.850

0.820

0.860

0.850

Barclays

0.536

0.583

0.418

0.639

0.373

0.702

0.608

0.950

0.720

0.750

0.820

HSBC

1.000

1.000

0.761

0.901

0.529

0.920

0.976

0.920

0.930

0.950

0.940

Baroda

0.838

0.997

0.770

0.742

0.845

0.881

1.000

1.000

0.850

0.820

0.930

Habib

0.401

0.332

0.290

0.298

0.356

0.495

0.441

0.250

0.440

0.460

0.520

BNPI

0.824

0.744

0.463

0.842

0.336

0.646

0.636

0.620

0.540

0.550

0.620

SBM

0.984

0.889

0.783

0.762

1.000

1.000

1.000

1.000

0.960

0.850

0.960

IOIB

1.000

0.998

0.737

0.688

0.816

0.990

0.983

0.950

0.960

0.925

0.930

SEAB

0.619

0.620

0.404

0.418

0.433

0.590

0.646

0.650

0.560

0.650

0.630

Delphis

0.935

1.000

1.000

1.000

0.968

1.000

0.920

0.960

0.940

0.930

0.920

Mean

0.799

0.797

0.622

0.719

0.623

0.805

0.804

0.810

0.820

0.750

0.960

Source: Computed.

19

TABLE 4. Overall Economic Efficiency of Banks (Banks Own Objective)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

MCB

0.705

0.759

0.554

0.730

0.526

0.746

0.721

0.852

0.808

0.825

0.963

Barclays

0.536

0.583

0.418

0.566

0.373

0.702

0.547

0.903

0.837

0.840

0.962

HSBC

1.000

1.000

0.761

0.901

0.529

0.920

0.976

0.960

0.948

0.952

0.856

Baroda

0.799

0.750

0.675

0.597

0.643

0.782

1.000

0.963

0.855

0.865

0.896

Habib

0.401

0.332

0.290

0.298

0.356

0.495

0.441

0.625

0.720

0.725

0.856

BNPI

0.824

0.744

0.463

0.842

0.336

0.646

0.518

0.723

0.683

0.745

0.854

SBM

0.928

0.889

0.783

0.762

1.000

1.000

1.000

0.993

0.943

0.952

0.856

IOIB

1.000

0.998

0.737

0.688

0.816

0.944

0.919

0.950

0.955

0.925

0.963

SEAB

0.619

0.620

0.404

0.418

0.388

0.506

0.598

0.750

0.690

0.526

0.968

Delphis

0.893

1.000

1.000

1.000

0.968

1.000

0.863

0.950

0.945

0.745

0.935

Mean

0.773

0.772

0.610

0.683

0.597

0.773

0.754

0.885

0.885

0.885

0.825

Source: Computed.

20

economic efficiency score, which is a product of technical efficiency

and allocative efficiency, are given in Table 4. The summary of
means of these scores is presented in Table 5.
Table 2 presents the technical efficiency (TE) scores in the case
where banks followed their own objective. The TE of individual
banks ranged between 0.752 and 1 while the average TE of all banks
collectively has been quite high ranging between 0.939 and 0.981. A
striking point to note is that the TE of MCB has been consistently
below the optimal level, which is 1, despite it being the largest bank
in Mauritius. The allocative efficiency (AE) of banks ranged from
0.290 to 1 (Table 3). The Habib bank which is a small bank, showed
relatively lower AE, ranging between 0.290 and 0.495.

Similarly, SEAB also showed low levels of AE that ranged between

0.404 and 0.646. Surprisingly, Barclays which is the fourth largest
bank in the country also registered relatively low AE in the range on
0.373 and 0.702 while in a small bank like Baroda, AE ranged from
0.742 and 1. The average AE of banks collectively was in a lower
range of 0.622 and 0.805 as compared to technical efficiency.

The overall efficiency (OE) of banks ranged from 0.290 to 1. The

OE of MCB ranged from 0.526 to 0.759 while SBM's OE fluctuated
between 0.762 and 1. It is surprising that a bank as small as IOIB
registered high OE ranging between 0.688 and 1 while HSBC, the
third largest bank registered OE in the range of 0.761 and 1 (except

21

for 0.529 in 1998). Barclays, which ranks just after the HSBC in
terms of size, showed relatively, lower OE fluctuating between
0.373 and 0.702. The overall economic efficiency of banks however
showed a declining trend in the first few years, falling from 0.773 in
1994 to 0.597 in 1998. It picked up to 0.773 in 1999 but fell again to
0.754 in 2000. The low levels of average overall efficiency are due
to lower allocative efficiency (that is the suboptimal input-output
mix given prices) rather than technical inefficiency. Table 5 reports
the summarised results across banks as well as over the period 1994
through 2004.
TABLE 5. Summary of Means (1994-2004) (Banks Own Objective)
Technical
Efficiency

Allocative
Efficiency

MCB
Barclays
HSBC
Baroda
Habib
BNPI
SBM
IOIB
SEAB
Delphis

0.889
0.969
1.000
0.862
1.000
0.973
0.992
0.984
0.954
0.985

0.767
0.551
0.870
0.868
0.373
0.642
0.917
0.887
0.533
0.975

Overall
Economic
Efficiency
0.677
0.532
0.870
0.749
0.373
0.625
0.909
0.872
0.508
0.961

Mean

0.961

0.738

0.709

Source: Computed.

22

According to Berger and Humphrey (1997), the world mean

efficiency value is 0.86 within the range of 0.55 (UK) - 0.95
(France). The overall efficiency score of all banks collectively in
Mauritius, over the period 1994 through 2004, is estimated at 0.71
which is within the range of the scores found in other countries but
lower than the world mean efficiency. A lower mean efficiency
score than the world mean would have important policy
implications. Firstly, there is a need for Mauritian banks to further
improve their efficiency so as to achieve the world best practice and
secondly, the government should help banks by creating an
appropriate policy environment that promotes efficiency.

Central Bank's Objective (model 2)

In order to incorporate the objective of economic growth and
financial soundness, we use a different set of outputs namely loans
and investments by the bank and one additional input which is the
provision for loans losses. These data are processed using DEAP to
generate efficiency scores to capture the impact of Central Banks
objectives. The different measures of efficiency are given in the
Table 6 9. One interesting result is that inefficiencies of banks are
lower when the Bank of Mauritius objectives of economic growth
and financial soundness are pursued as compared with the case
when banks are only maximising their own objective.

23

TABLE 6. Technical Efficiency of Banks (Central Banks Objectives)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

MCB

0.956

1.000

0.950

1.000

1.000

0.996

0.950

0.960

0.950

0.830

0.850

Barclays

0.918

0.833

0.873

0.948

1.000

0.936

0.873

0.850

0.852

0.790

0.850

HSBC

1.000

1.000

1.000

0.925

1.000

1.000

1.000

1.000

0.860

0.920

0.930

Baroda

1.000

0.962

1.000

1.000

1.000

1.000

1.000

1.000

0.982

0.796

0.825

Habib

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.988

0.859

0.916

0.936

BNPI

1.000

1.000

0.727

1.000

1.000

1.000

0.727

0.925

0.725

0.852

0.745

SBM

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.985

0.956

0.952

0.936

IOIB

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.952

0.963

0.985

SEAB

1.000

1.000

0.939

1.000

0.976

0.837

0.939

0.936

0.940

0.952

0.965

Delphis

0.998

1.000

0.906

1.000

0.948

1.000

0.906

0.925

0.936

0.895

0.954

Mean

0.987

0.980

0.940

0.987

0.992

0.977

0.940

0.952

0.954

0.856

0.985

Source: Computed.

24

TABLE 7. Allocative Efficiency of Banks (Central Banks Objectives)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

MCB

0.908

1.000

1.000

0.971

1.000

1.000

1.000

1.000

0.925

0.936

0.944

Barclays

0.927

0.989

0.998

0.990

0.890

0.985

0.998

0.985

0.925

0.925

0.889

HSBC

0.964

0.907

0.791

0.999

1.000

0.756

0.791

0.812

0.852

0.936

0.942

Baroda

0.841

0.866

0.622

0.896

0.739

0.728

0.622

0.633

0.625

0.825

0.741

Habib

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.925

0.985

0.936

0.988

BNPI

0.875

0.842

0.910

0.993

0.778

0.692

0.910

0.895

0.941

0.952

0.899

SBM

0.800

0.972

1.000

0.859

0.855

1.000

1.000

0.658

0.988

0.758

0.985

IOIB

0.846

1.000

0.889

0.945

0.871

0.973

0.889

1.000

0.925

0.952

0.985

SEAB

1.000

0.962

0.891

0.947

0.874

0.993

0.891

0.825

0.936

0.952

0.940

Delphis

0.916

0.842

0.896

1.000

0.865

0.863

0.896

0.856

0.825

0.936

0.863

Mean

0.908

0.938

0.900

0.960

0.887

0.899

0.900

0.925

0.936

0.852

0.842

Source: Computed.

25

TABLE 8. Overall Economic Efficiency of Banks (Central Banks Objective)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0.868

1.000

0.950

0.971

1.000

0.996

0.950

0.980

0.938

0.883

0.897

Barclays 0.851

0.824

0.871

0.939

0.890

0.922

0.871

0.918

0.889

0.858

0.870

HSBC

0.964

0.907

0.791

0.924

1.000

0.756

0.791

0.906

0.856

0.928

0.936

Baroda

0.841

0.833

0.622

0.896

0.739

0.728

0.622

0.817

0.804

0.811

0.783

Habib

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.957

0.922

0.926

0.962

BNPI

0.875

0.842

0.662

0.993

0.778

0.692

0.662

0.910

0.833

0.902

0.822

SBM

0.800

0.972

1.000

0.859

0.855

1.000

1.000

0.822

0.972

0.855

0.961

IOIB

0.846

1.000

0.889

0.945

0.871

0.973

0.889

1.000

0.939

0.958

0.985

SEAB

1.000

0.962

0.837

0.947

0.853

0.831

0.837

0.881

0.938

0.952

0.952

Delphis

0.914

0.842

0.812

1.000

0.820

0.863

0.812

0.891

0.881

0.916

0.909

Mean

0.896

0.919

0.845

0.948

0.880

0.878

0.845

0.939

0.945

0.854

0.914

MCB

Source: Computed.

26

The technical efficiency (TE) of banks ranged from 0.727 to 1

(Table 6). Unlike banks pursuing their own objective, in this case
MCB registered higher TE ranging between 0.950 and 1. BNPIs TE
was generally at its optimum level except in 1996 and 2000 when it
fell to 0.727. Surprisingly, Baroda's TE was also at its optimum
level in all periods except in 1995 while it showed lower TE when
pursuing its own objective.

The allocative efficiency (AE) of banks pursuing the central bank's

objective ranged from 0.622 to 1, which is higher than the range of
0.290 to 1, registered when banks pursued their own objective
(Table 7). Habib banks AE was at its optimum level throughout all
the years. In the case of Barclays pursuing the central bank's
objective, it registered much higher AE between 0.890 and 0.998.
MCB and SBM also showed much higher AE when pursuing the
central bank's objective.

The overall efficiency of banks when they incorporate the Central

Banks objectives fluctuated between 0.622 and 1 over the period of
study (Table 8). Except for BNPI, Baroda and HSBC, which
registered some low levels of overall efficiency in certain years, all
other banks showed overall efficiency higher than 0.80. The average
OE of all banks collectively had an erratic behavior in the first four
years, fluctuating between 0.845 and 0.948.

27

TABLE 9. Summary of Means (Central Banks Objectives)

Technical
Efficiency

Allocative
Efficiency

Overall Economic
Efficiency

MCB
Barclays
HSBC
Baroda
Habib
BNPI
SBM
IOIB
SEAB
Delphis

0.979
0.912
0.989
0.995
1.000
0.922
1.000
1.000
0.956
0.965

0.983
0.968
0.887
0.759
1.000
0.857
0.927
0.916
0.937
0.897

0.962
0.881
0.876
0.754
1.000
0.786
0.927
0.916
0.895
0.866

Mean

0. 972

0. 913

0. 886

Source: Computed.
It would be interesting to compare efficiencies of banks under these
two conditions, namely when banks are pursuing their own
objectives and banks are incorporating the objectives of the Central
bank. In both conditions, as indicated in Table 4 and Table 6, we
find that banks have been maintaining relatively high scores of
average technical efficiency from 1994 to 2004. But the difference
in efficiencies is more explained in terms of allocative efficiencies.
From Table 3 and Table 7, it is found that the mean allocative
efficiency scores of banks over the period were lower in the case
when banks are pursing their own objectives rather than the central
banks objectives. Thus, the overall economic efficiency of banks
turns out to be lower when the central banks objectives are taken
into account. The mean allocative efficiency score for the period

28

under study is estimated at 0.709 when banks pursue their own

objectives as compared with a figure of 0.886 when central banks
objectives are incorporated.

Moreover, it should be noted that DEAP provides a relative

performance measure. It is a comparative analysis and we separate
those, which are good relative to those, which are bad, worse or
worst.

These are reported in the tables and diagrams in the

appendix.

Mean efficiency score means an average value of

efficiency over the years, minimum means the minimum efficiency

value that the bank has had over the years while gap (in percentage)
means how much less, the non best practice banks produce the best
practice banks on average. Tables 12 to 17 show these summary
statistics for TE. AE and OE for both models, respectively. The
mean and minimum efficiency behaviour of the same are illustrated
in charts 1 to 6 while the corresponding evolution of efficiency gaps
for both models are shown in charts 7 and 8.

We find a lot of fluctuations in the gaps over the period of study in

the case of technical efficiency, allocative efficiency and overall
economic efficiency in both models. In terms of the overall
economic efficiency, in the case when banks are maximising their
objectives, the gap has been reduced especially since 2001
indicating a general increase in efficiency of non-best practice
banks. However, in the case of model 2, there is no clear trend as
the gaps have been fluctuated but with relatively lower values as

29

compared with model 1. This conforms to our earlier results that

efficiencies are lower when banks are pursuing the objectives of
financial soundness.

V.

CONCLUSION

To sum up, in this paper, we have computed technical, allocative

and economic indicators of banking performance in terms of
efficiency scores under two different situations. First, when banks
pursue their own objectives to maximize revenues and second, when
banks pursue the objectives of the central bank, namely financial
stability and economic performance. An analysis of the efficiency
scores confirms that in both situations technical efficiencies have
been relatively high. However, the differences in overall economic
efficiencies were due to lower allocative efficiencies. The mean
allocative efficiencies of banks were lower when banks pursued
their own objectives rather than the central banks objectives.

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37

APPENDIX
The Mauritian banking sector can be categorised into three domestic
banks, five foreign banks and two foreign banks locally
incorporated. Two of the domestic banks, namely MCB and SBM,
hold about 70 per cent of the total banking assets and deposits,
dominating the loan banking landscape. Although MCB has
maintained its deposit share over the period 1994 and 2004, the
share of deposits of the SBM has declined from 29.8 per cent in
1994 to 24.6 percent in 2004. Among the foreign banks, HSBC has
the largest share of assets and deposits of about 9 per cent, followed
by Barclays with a share of about 6 per cent. Among the foreign
banks locally incorporated, the deposit share of Delphis increased
from about 2 per cent to 4.4 per cent in 1997 as it took over a bank
in liquidation. It gradually rose to 5.0 per cent in 2004. The ratio of
profit after tax out of the total is relatively high for the SBM as
compared to MCB although the deposit share of the SBM (28 per
cent on average) is much lower than that of the MCB with an
average deposit share of 43 per cent.

For most banks, non-interest income coming mainly from profit

derived

from foreign currency transactions and

fees and

commissions, is as important a source of banking income as interest

income. However, for HSBC and Barclays, non-interest income has
been the major source of income over the period 1994-2004. Total
loans represent about 60 per cent of bank's total assets. The share of
loans out of total loans is largely comparable to the deposit share of

38

banks with the two largest banks allocating about 75 per cent of total
loans. The credit-deposit ratio, which describes the extent to which
banks fund their loan activities out of deposits and which also
measures the extent of risk has been on an upward trend over the
period 1994-2004, rising from 67.3 per cent in 1994 to 79.2 per cent
in 2004. Banks' provision for loan losses as a ratio of total loans
averaged to 0.9 per cent over the period 1994-2004. Baroda and
Habib made the highest provisioning while MCB, SBM and Delphis
had relatively lower provisions for loan losses.

The upshot of the above analysis is that the banking sector

developments indicate symptoms of lopsided growth and banking
sector concentration. Profitability, total assets and deposits of banks
have expanded but varied across banks.
Selected Banking Sector Indicators (per cent)
Assets Deposits

Profit
before
Tax

Interest NonIncome interest

Income

Loans Provision
for Loan
Losses

Local Banks:
MCB

1994
2000
1994-2004

SBM

IOIB

44.2

44.1

32.1

36.3

46.1

45.5

0.83

45.6

43.9

38.2

45.6

44.8

50.2

0.82

44.5

41.28

40.85

45.23

44.4

49.5

0.82

1994

29.7

29.8

31.3

32.0

21.7

28.7

0.76

2004

26.0

25.6

39.9

26.8

35.7

29.0

0.45

1994-20042

29.7

29.1

35.4

30.8

31.8

27.0

0.58

1994

2.2

2.2

4.1

3.1

1.7

2.1

1.16

200

2.5

2.7

1.5

2.9

1.0

2.1

1.07

1994-20042

2.5

2.5

2.3

3.0

1.5

2.4

1.02

39

Assets Deposits

Profit
before
Tax

Interest NonIncome interest

Income

Loans Provision
for Loan
Losses

Foreign Banks:
HSBC

1994

7.4

7.3

13.5

8.2

9.3

8.1

0.05

2004

10.0

10.9

10.8

9.9

10.7

6.7

0.63

1994-20042

8.8

9.1

9.6

8.7

10.4

8.3

1.22

Barclays 1994

6.6

6.7

6.7

7.7

10.5

5.8

2.22

2000

6.1

6.6

4.5

6.0

7.0

6.2

1.56

6.1

6.3

5.3

6.2

8.4

5.5

1.89

1994

3.9

4.0

5.5

5.0

4.9

4.3

0.01

2004

2.9

3.1

1.3

2.7

2.6

1.9

1.73

3.3

3.4

3.6

3.6

3.9

3.1

0.85

1994

2.2

2.2

3.3

3.1

1.5

1.9

0.32

2004

1.9

2.1

1.0

2.1

1.1

0.8

7.49

2.0

2.1

1.7

2.2

1.2

1.3

3.06

0.8

0.9

1.4

1.2

0.9

0.6

9.27

0.7

0.7

1.4

0.9

0.5

0.3

13.57

0.8

0.8

1.2

0.9

0.7

0.4

8.51

1994-2000
BNPI

1994-2004
Baroda

1994-2004
Habib

1994
2004
1994-2004

Foreign Banks Locally Incorporated:

Delphis 1994

1.6

1.5

1.2

1.7

1.4

1.5

0.65

2004

5.3

5.0

3.1

5.4

3.1

3.9

0.85

1994-20042

3.6

3.5

2.7

3.9

2.8

3.3

0.94

1994

1.3

1.2

1.0

1.7

1.8

1.6

5.94

2004

1.0

1.1

0.1

1.3

0.6

0.9

0.75

1.2

1.1

0.5

1.4

1.1

1.2

1.86

SEAB

1994-2004

share out of total.

mean share out of total over the period 1994-2004
share out of total loans.
Source: Computed from Banks Balance Sheets.

40

Summary Statistics on Banks

Rs millions

2001

2002

2003

2004

Charge for bad and doubtful

debts
Total advances of banks
Interest income
Interest expense
Non-interest income
Staff and operating expenses
Operating profits
Capital

407

685

936

814

71507
10572
6857
4521
2954
3594
8754

74715
10572
6371
4201
2941
3353
8598

85839
12154
7232
4922
3653
4275
8965

89037
1325
7584
5845
3954
4521
8457

Source: Commercial Banking Reports.

Technical Efficiency of Banks (model 1) Summary Statistics
Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

mean
0.967
0.97
0.981
0.981
0.958
0.961
0.94
0.96
0.95
0.94
0.93

minimum
0.943
0.752
0.877
0.812
0.761
0.857
0.814
0.825
0.82
0.825
0.812

gap (%)
3.3
3
1.9
1.9
4.2
3.9
6
4
5
6
7

Gap: (1-mean)*100 indicates how much less, in percentage, the nonbest practice banks produce the best practice banks on average.
Source: Computed.

41

Chart 1
Mean and minimun efficiency scores of technical efficiency

1.2

Efficiency scores

0.8

mean

0.6
min

0.4

0.2

0
1992

1994

1996

1998

2000

2002

Years

42

2004

2006

Allocative Efficiency of Banks Summary Statistics

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

mean
0.799
0.797
0.622
0.719
0.623
0.805
0.804
0.81
0.82
0.75
0.96

min
0.536
0.583
0.418
0.418
0.336
0.495
0.441
0.81
0.54
0.55
0.52

gap (%)
20.1
20.3
37.8
28.1
37.7
19.5
19.6
19
18
25
4

Gap: (1-mean)*100 indicates how much less, in percentage, the nonbest practice banks produce the best practice banks on average
Source: Computed.

43

Chart 2
Mean and minimum allocative efficiency scores

1.2

Efficiency scores

0.8

mean

0.6
min

0.4

0.2

0
1992

1994

1996

1998

2000
Years

44

2002

2004

2006

Economic Efficiency of Banks (model 1): Summary Statistics

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

min
0.536
0.332
0.29
0.418
0.388
0.506
0.518
0.625
0.68
0.52
0.82

mean
0.773
0.772
0.61
0.683
0.597
0.773
0.754
0.885
0.885
0.885
0.825

gap (%)
22.7
22.8
39
31.7
40.3
22.7
24.6
11.5
11.5
11.5
17.5

Gap: (1-mean)*100 indicates how much less, in percentage, the nonbest practice banks produce the best practice banks on average
Source: Computed.

45

Chart 3
Mean and Minimum economic efficiency scores

1
0.9
0.8

Efficiency scores

0.7
0.6
min

0.5

mea
n

0.4
0.3
0.2
0.1
0
1992

1994

1996

1998

2000
Years

46

2002

2004

2006

Technical Efficiency of Banks (model 2): Summary Statistics

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

min
0.918
0.833
0.727
0.825
0.948
0.837
0.727
0.925
0.725
0.79
0.93

mean
0.987
0.98
0.94
0.987
0.992
0.977
0.94
0.952
0.954
0.856
0.985

gap (%)
1.3
2
6
1.3
0.8
2.3
6
4.8
4.6
14.4
1.5

Gap: (1-mean)*100 indicates how much less, in percentage, the nonbest practice banks produce the best practice banks on average
Source: Computed

47

Chart 4

Mean and minimum efficiency scores

1.2

Efficiency scores

0.8

min

0.6

mea
n

0.4

0.2

0
1992

1994

1996

1998

2000
Years

48

2002

2004

2006

Allocative Efficiency of Banks (model 2); Summary Statistics

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

min
0.841
0.866
0.622
0.971
0.739
0.692
0.791
0.812
0.941
0.826
0.741

mean
0.908
0.938
0.9
0.96
0.887
0.899
0.9
0.925
0.936
0.852
0.842

gap (%)
9.2
6.2
10
4
11.3
10.1
10
7.5
6.4
14.8
15.8

Gap: (1-mean)*100 indicates how much less, in percentage, the

non-best practice banks produce the best practice banks on average
Source: Computed.

49

Chart 5
Mean and Minimum efficiency scores

1.2

efficiency scores

0.8

min

0.6

mea
n

0.4

0.2

0
1992

1994

1996

1998

2000
Years

50

2002

2004

2006

Economic Efficiency of Banks (model 2): Summary Statistics

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

min
0.851
0.833
0.622
0.859
0.778
0.692
0.662
0.817
0.881
0.854
0.822

mean
0.896
0.919
0.845
0.948
0.88
0.878
0.845
0.9385
0.945
0.854
0.913

gap (%)
10.4
8.1
15.5
5.2
12
12.2
15.5
6.15
5.5
14.6
8.65

Gap: (1-mean)*100 indicates how much less, in percentage, the

non-best practice banks produce the best practice banks on average
Source: Computed.

51

Chart 6
Mean and minimun efficiency of banks

1.2

Efficiency scores

0.8

min

0.6

mea
n

0.4

0.2

0
1992

1994

1996

1998

2000
Years

52

2002

2004

2006

Chart 7
Gaps of efficiency measures

45

40

Efficiency scores

35

30
te1

25

ae
1
oe
1

20

15

10

0
1992

1994

1996

1998

2000
Years

53

2002

2004

2006

Chart 8
Efficiency gaps in model 2

18

16

Efficiency measures

14

12
te2

10

ae
2
oe
2

0
1992

1994

1996

1998

2000
Years

54

2002

2004

2006