The efficiency of the commercial banks in six Pacific Island countries : a dissertation in partial fulfilment of the requirements for the degree of Doctor in Philosophy, Banking Studies, School of Economics and Finance, Massey University, Palmerston North, New Zealand
This thesis explores the efficiency of the commercial banks in six Pacific Island
Countries (PICs): Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga, and
Vanuatu over the period 2000 to 2006 using Data Envelopment Analysis (DEA). The
use of DEA is justified primarily due to the small number of commercial banks
operating in these small countries. This is the first detailed study of the relative
efficiency and performance of banking firms in this selected group of small countries.
The dominant feature of this research is to investigate the primary prudential tools
commonly used by banking supervisors in regulating the local banking system. In our
understanding, this is the first effort to investigate the link between individual
prudential tools and bank efficiency.
The small number of banks in this dataset further enables a structural investigation of
the relative efficiency across commercial banks nationally and across countries,
employs a series of explanatory variables to explain the possible sources of efficiency
variation, and provides a series of practical measures to validate resulting efficiency
scores from DEA. This comprehensive structural construct is also a new development
in bank efficiency studies.
The key research finding is the identification of liquidity requirements as the main
source of bank inefficiency. Capital requirements are not only ineffective in
promoting bank efficiency but in the absence of formal liquidity requirements, they
become a contributing factor for causing asset deterioration. Hence, asset quality is
inversely related to bank efficiency. Scale inefficiency is unusually large compared
with reported scale inefficiency in the literature and in most countries, it dominates
Finally, efficiency-based ratios should continue to supplement resulting efficiency
scores, at least in the current measurement and development of bank efficiency in the
context of smaller developing economies.