Academic journal article International Journal of Business and Information

Operational Efficiency and Productivity Change of Major Cambodian Financial Institutions during the 2006-2011 Period1

Academic journal article International Journal of Business and Information

Operational Efficiency and Productivity Change of Major Cambodian Financial Institutions during the 2006-2011 Period1

Article excerpt

1. INTRODUCTION

Since the early 2000s, Cambodia has achieved high economic growth and remarkable success in modernizing its economic structure. Although Cambodia is known as an agriculturally oriented country, recently its focus has shifted to the industrial and service sectors. With the transformation from a basically self-consuming economy based on social planning to a market economy based on nationwide trade networks, the Cambodian government has adopted a long-term vision and strategy aimed at developing its economy by implementing structural reforms in all sectors of its economy, including the financial system.

The Cambodian government is eagerly involved in reforming the financial systems that are viewed as having an important role in developing economies. The International Monetary Fund [IMF, 2011] acknowledged the remarkable achievements of the Cambodian financial system. First, the National Bank of Cambodia (NBC) gained recognition for its prudent policies and regulations. Second, banks are increasingly beginning to reap the benefits of transparency, even to the extent of obtaining international credit ratings. Third, the government's steadfast adherence to the market, freedom from exchange controls, and unrestricted capital movement make it one of the most "business friendly" environments in the region. The rapid development of the financial system, however, has also exposed it to challenges [Ahmed and Runggcharoenkitkul, 2014; IMF, 2011]. For instance, with many new bank entrants, Cambodia is over-banked compared with its regional neighbors and other countries at a similar level of development. In addition, financial institutions face many obstacles such as lack of adequate human resources, the inability to obtain sources of funds, ineffective management, regulatory compliance, and inefficiency of accounting systems, to name a few..

Although efficient financial institutions are essentially needed to promote economic development, there are no previous studies analyzing the performance of financial institutions in Cambodia. The lack of analytical information about the performance of financial institutions has been a serious obstacle for policy makers in monitoring the financial sector and designing an efficient financial system. The purpose of the current study is to provide useful information to assess the operational efficiency of Cambodian financial institutions and to analyze the changes in their productivity and technology. This study could be the first attempt to analyze the performance of the Cambodian financial sector from the viewpoint of economics. The results presented in this paper may be useful in understanding how the different attributes of financial institutions - such as size of business, ownership structure, and core of business - affect their operational efficiency and productivity change.

The findings of this study may also help financial institutions in strategic planning, enable policy makers to improve the overall efficiency of the financial industry, and identify the need for reforms for domestic financial institutions. This study uses data envelopment analysis (DEA) to measure the difference in technical efficiency among financial institutions and to examine the changes in total factor productivity (TFP) of these institutions over time. The operating approach and value-added approach will be used to explore the differences in productivity among banks. Data limitations allow the authors to focus on only 18 out of nearly 30 Cambodian commercial banks, specialized banks, and MFIs for the period 2006-2011.

The remainder of this paper is organized as follows. Section 2 provides a brief overview of the Cambodian financial industry. Section 3 outlines the data and methodology used in the study. Section 4 presents the empirical results from the DEA approach. Section 5 presents concluding remarks and offers recommendations for future research.

2. OVERVIEW OF THE CAMBODIAN BANKING INDUSTRY

This section includes a discussion of background information on the banking industry in Cambodia and provides a breakdown of the operational indicators of major Cambodian banks. …

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