Efficiency, competition and credit risk in Madagascar’s banking sector – a two-stage DEA-SBM-Malmquist analysis

Abstract

This study analyzes the efficiency of commercial banks in Madagascar, as well as the effect of credit risk, competition, and the macroeconomic environment on their efficiency during the period 2010-2024. Our hypotheses were initially supported by the literature and also by the BFM survey of the banking sector. A two-stage approach was used, combining the SBM DEA double frontier method following Wang et al. (2007) and a second-stage regression estimated using wild bootstrap clusters. This methodological strategy allows for a rigorous measurement of efficiency while correcting for econometric problems. The empirical results highlight a negative effect of credit risk on banking efficiency, thus reducing operational performance. The Lerner index shows a positive effect, with the most efficient banks gaining market power and generating higher margins. Furthermore, economic growth has a positive effect on banking efficiency, and banks have generally been more resilient to COVID-19. Therefore, a favorable macroeconomic environment improves borrower creditworthiness, stimulates credit demand, and reduces payment defaults.