Bank Efficiency in Albania

The importance of efficiency measurement in the financial sector is related to the extremely extensive impact that an efficient financial system has on the microeconomic as well as macroeconomic level. The Albanian banking system is the key actor of financial intermediation.

In this context its role is fundamental in efficiently and safely transforming financial flows from potential investors into productive investments in the economy. In order to properly allocate the economic resources, banks need to be efficient.

During the 1990s, banking sectors in transition economies of Central and Eastern Europe, including Albania, had gone through dramatic changes due to liberalization, privatization, and consolidation accompanied by large-scale participation of foreign banks. In Albania the banking system with a two tier level is new in a time context, as before `90 there was only one government owned bank.

The continuously increasing competition in the Albanian banking industry creates a need for an access to informa¬tion that would allow to evaluate commer¬cial banks operating in this market. Such evaluations are really essential to both bank owners and customers who expect high-level financial profits.

This paper intends to present an overview of Albanian banking system and evaluate its efficiency during the last 4 years. Data on the 8 largest Albanian banks in a period from 2008 to 2011 will be used.

To estimate banks' efficiency, we can use different methods. These methods can be classified in various ways. One of them distinguishes:

* the traditional method of financial indi¬ces based on balance sheet analysis,

* parametric methods based on the knowledge of production function,

* non- parametric methods that do not re¬quire such knowledge.

For the purpose of this paper, the Data Envelopment Analysis (DEA) will be used to evaluate banks' efficiency. This method has become increa¬singly popular in measuring bank efficiency in the countries with developed banking systems.

DEA is a methodology for analyzing the relative efficiency and managerial performance of decision making units (DMUs), having the same multiple inputs and multiple outputs. Two different DEA models will be used under the intermediation approach in estimating the relative efficiency of the banks: 1) CCR model and 2) BCC model.

The banking market will be segmented according to bank size, ownership structure, date of establishment and quality of assets in order to explore how these bank characteristics affect efficiency.

After assessing the model, the reasons that would explain the achieved results will be discussed.