INTERMEDIATION EFFICIENCY AND PRODUCTIVITY OF THE BANKING SECTOR IN KENYA

The main objective of the study is to investigate intermediation efficiency and productivity in the banking sector in the post liberalization period in Kenya. The study is motivated by the fact that though the banking sector constitutes a large part of the financial system in Kenya, little is known about its intermediation efficiency and productivity status. Further banks are awash with liquidity despite private sector credit demand indicating some inefficiency in the intermediation process in Kenya. This study adopts a non-parametric Data Envelopment Analysis (DEA) to analyze intermediation efficiency in the banking sector and Malmquist Productivity Index (MPI) to measure productivity gains of banks in Kenya. The results show that though the banks were not fully efficient in all respects, they performed fairly well during the period under study. Banks still have reason and scope to improve performance by improving their technology, skills and enlarging their scale of operations so as to be fully efficient. Based on the main conclusions, policies encouraging competition, products diversification to advance loans, risks minimization through increased capital regulation and privatization of some banks are generally recommended.