Measuring the financial performance of banks in the Horn of Africa: A case of Ethiopian and Kenyan banks

As the main part of the financial system, banks are considered the engine of economic development. Especially in developing countries where capital markets are not sufficiently developed, banks are of great importance for the smooth functioning of the economy. However, in order for banks to properly fulfill their duties in the financial system, banks must work effectively and effectively. In this study, the fınancıal performance of banks in the Horn of African (HoA) region is measured by comparatively analysing efficiency of Etiyopyan and Kenyan banks for the period of 2015-2018. In the study, a two-stage method of efficiency analysis was adopted. In the first stage of the analysis, the efficiency of the banks was analyzed using the Data Envelopment Analysis (DEA) method, and in the second stage, the Tobit regression analysis method was applied to see the factors determining bank efficiency. Comparative efficiency analysis results showed that the average efficiency of Ethiopian and Kenyan banks have increased significantly over the four-year study period. It was also revealed that Kenyan banks are on average more efficient than Ethiopian banks in all efficiency types such as technical efficiency, pure technical efficiency and scale efficiency. Furthermore, based on ownership, foreign owned banks are the most efficient, followed by state owned banks; domestic private banks are the least efficient. Tobit regression analysis results showed a significant positive relationship between bank profitability and bank efficiency. Similarly, bank efficiency has a significant positive relationship with per capita GDP and a negative relationship with inflation rate. On the other hand, there is a significant negative relationship between asset quality and bank efficiency. Bank technical efficiency also has a significant negative relationship wıth credit risk as well as liquidity risk. This indicates in Kenyan and Ethiopian banking sector banks with high levels of risk exposure are less efficient. There is a significant negative relationship between bank size and technical efficiency. It was noted from analysis of financial development indicators that though the financial sector of HoA countries is improving in recent years, owing to economic growth of the countries and advances in electronic banking services, overall the region is still characterized by low level of financial development.