Financial liberalization and bank efficiency: evidence from post-war Lebanon

Abstract

The process of financial liberalization has stiffened competition in an environment characterized by a revolution in information technology and provided an incentive for bank management to focus on improving efficiency. To date, limited studies were conducted for Middle East banking sectors, a region with great potential for cross-border financial integration. This article uses a unique data set from post-war Lebanon to investigate, (1) how bank efficiency is evolving subsequent to a period of deregulation, (2) how well large banks are performing relative to small banks and (3) how efficiently are domestic banks competing with foreign banks. The average cost inefficiency of Lebanese banks appears to be small (around 12%) compared to the results reported in the literature. The findings indicate that cost efficiency has improved over the period under study, that consolidation in the financial sector has enhanced banking efficiency and that domestic banks are as efficient as foreign banks.