Efficiency of financial institutions: a stochastic frontiers analysis approach

Aljar Meester’s thesis consists out of studies in which the efficiency of financial institutions play a central role. First of all, Meesters evaluates the influence of institutions on the cost efficiency of banks. Institutions in this context are the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. Cost efficiency measures if a bank does not make more costs than necessary.

The results show that well developed institutions do have a positive effect on cost efficiency. Moreover, good institutions have a positive effect on the adoption of new technologies by banks. Since banking is an international business, this study is extended by examining the impact of institutions on foreign banks. It turns out that not only the institutions of the host country are important for the cost efficiency, but, also the institutions in the home country of the foreign bank. Furthermore, the results indicate that the more equal the institutions between the host and home countries are, the easier it is for a bank to operate cost efficient.

In the next study Meesters examines the trade off between outreach and cost efficiency of microfinance institutions (MFIs). MFIs focus on providing credit to the poor who have no access to commercial banks, in order to reduce poverty and to help the poor with setting up their own income generating businesses. In the literature, this focus is generally described as outreach. The results show that there is indeed a trade off between outreach and cost efficiency.

Finally, the impact of an efficient financial sector on economic growth is examined. The results show that an efficient financial sector is important for economic growth. In addition, the results show that the size of the financial sector only fosters economic growth if the sector is sufficient efficient.

Curriculum vitae
Aljar Meesters (Heerenveen, 1982) studied economics in Groningen and conducted his PhD research at SOM. Meesters is currently lecturer/researcher at the Faculty of Economics and Business. He will be awarded his PhD on 3 December 2009 (1.15pm). The thesis supervisors are prof.dr. R. Lensink and prof.dr. N. Hermes. The thesis title : Efficiency of financial institutions: a stochastic frontiers analysis approach.