Abstract:
In this study overall financial development and the performance of commercial
banks in Georgia during 1991-2000 is analyzed. Georgian banking system emerged
from a scratch after the country gained its independence in 1991. Initial reform path
turned out to be very arduous, full of failures and disappointments. After complete
chaos of 1991-1994 the banking sector recovered quickly owing to extreme
measures taken by the authorities. We discuss in detail the policies pursued by the
National Bank of Georgia, the outcomes of these policies and contrast general
performance of Georgian banks with banks in other transitional economies and
developed countries.
To measure performance of individual commercial banks in 2000, Data
Envelopment Analysis (DEA) was employed. DEA has been extensively used to
study commercial bank efficiency over the last two decades. Major advantages of
DEA are its applicability to small samples, employment of less information than
required by alternative parametric approaches (e.g. information on prices and the
knowledge of functional form for the production relationship is not necessary) and
the ability to perform analysis with multiple inputs and outputs.
We found that inefficiency in the Georgian banking sector was equally due to pure
technical and scale inefficiencies; large banks were oversized because of excessive
branching contributing to their scale inefficiency; and there was a significant
positive relationship between efficiency and profitability.
