The efficiency of Azerbaijan banking system

The objective of this paper is to analyze the efficiency performance of Azerbaijan banking system between 2002 and 2007, a period characterized by high economic growth and tight control by National Bank. Overall, pure technical and scale efficiency of Azerbaijan commercial banks are measured with the use of Data Envelopment Analysis. In empirical results over the study period overall and pure technical efficiency scores show a great variation, which means banks have scale problems. Overall efficiency decreases over the study period. The main reasons are reforms of National Bank, regulations, new banking law of 2004 and high economic growth. It can be thought that in the short run these structural changes would have negative effects on efficiency, but in the long run efficiency would improve. Efficiency of state banks was slightly above private banks, except 2004 and 2006. It is also found that state banks are managed better than private counterparts. Results show that banks have problem of converting deposits into loans and collecting interest income from borrowers.