Bank efficiency analysis of financial innovations: dea model application for the institutional concept

Abstract

Globalization and digitization of the banking and financial market are well known. They are the trends of this decade-defining the context and efficiency of the banking business. Financial innovations introduced by new technologies have provided banks with the necessary utilities to seize the possibilities to tap into efficiency and competitive advantage gains. In this context, this study seeks to assess the overall efficiency of Azerbaijanian banks in adopting and utilizing financial innovation in providing financial products and services. The data envelopment analysis was applied to compute and compare the ability of financial intermediaries to adopt financial innovations via modern technologies efficiently. Based on the institutional value-added concept, the aggregate efficiency score for each of the 14 banking institutions was calculated. The inefficiency sources were derived from the overall technical efficiency decomposition into pure technical efficiency and scale efficiency. The results showed that only four banks had utilized financial innovations in the banking production process to increase their value-added during 2017-2019. Decomposition results further indicated that slight values of the overall technical inefficiency were caused by scale inefficiency. Thus, these banks' had the capacity for banking business value-added growth by 5-16% just by adjusting scales. Simultaneously, all significant deviations from the absolute overall technical efficiency caused by both pure technical efficiency and scale efficiency. Therefore, there is still much room for banking institutions to increase value-added by adjusting scales and enhancing banking operations and management.