Ihsan Isik, Mohammed Omran and M. Kabir Hassan
The purpose of this study is to analyse the X-efficiency of banking firms operating in an emerging market, by drawing particularly on the Jordanian experience. Similar to some other Arab countries in the region, Jordan has embarked on important economic and social reforms to promote efficient financial markets and institutions for a genuine and enduring economic growth. Some empirical studies have found that management quality is the predominant cause of operating inefficiency and eventual failure in financial institutions. Thus, the type of X-efficiency we consider in this study is managerial efficiency (ME), which refers to optimal utilization of productive resources by bank management. Because it relies solely on the amounts of inputs and outputs in its calculation and does not involve factor prices, which are mostly market or regulation driven, technical inefficiency is entirely under the control of bank management and thus results directly from management laxity and. Our results indicate that public and foreign ownership is negatively associated with efficiency. Managerial efficiency also declines with ownership concentration, perhaps implying that closely held and family-owned businesses are not efficient organizational structures. Internationalization of bank operations seems to benefit domestic banks in terms of operational efficiency, as banks may be able to exploit scale and scope economies with the expansion of operations to new markets. Likewise, increasing size, producing more loans as a fraction of total assets or expanding market share in the domestic market appear to be the main characteristics of more efficient firms, all of which again suggest that increasing scale of operations may be one solution to eliminate underutilization of factor inputs in the Jordanian banking.