THEORETICAL REVIEW ON EFFICIENCY OF COMMERCIAL BANKS

Abstract

This article aims to present an in-depth background of theories that relate to the efficiency of commercial banks. Several theories have been applied by scholars to assess the determinants of efficiency for banks and the banking sector (Poczter, 2017). The theories include the economic theory of demand and supply, which considers the impact of interest rates on credit demand (Athanasoglou et al., 2006); the modern production theory, which assesses how effectively firms such as banks use inputs to produce outputs using concepts such as cost, scale, price and technical efficiency, the modern portfolio theory proposed by Markowitz in 1952, which seeks to find the optimum portfolio for investors concerned with distribution of returns over a single time horizon (Osifo and Ighodaro, 2020); the dynamic efficiency theory, which considers the ability of firms or markets to innovate and optimise over time in response to changing conditions and new information (Frantz, 1988); the market power theory, which assumes that the market structure of the industry influences the financial performance of a firm (Khana and Hanif, 2019), the stakeholder theory,which considers the broader impact of firms such as banks on their environment; and the agency theory, which looks at the role of management and the concept of corporate governance (Mwenda and Mutoti, 2011).