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

Abstract

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 technical inefficiency. 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.