Any suggestions of good measures of credit union (SACCO) efficiency? If you would also like to collaborate on such a study, let me know. I intend to pursue a study on credit union efficiency in Kenya, a developing country with a vibrant credit union sector. Please share your thoughts...
I would have thought that you would need a measure which takes into account both the financial intermediation and poverty reduction or other benefits.
I would have thought is it not only about the measure, as there is likely not to be a single measure but rather the technique used to measure the multiple goals and the trade-offs between them.
David, I agree with Gary and Jimmie: you're going to need a multi-factor model for this research. I'm not sure why your focus is "efficiency"--vs., say, "effectiveness"--but I defer to the word you used--efficiency.
In that context, let me offer the following thoughts, which I offer in no particular order of significance. I stipulate that I am not an expert on credit unions.:
1. A key efficiency measure in commercial banking in the U.S. is the "Operating Ratio." It is defined as: Non-interest Operating Expenses ÷ Net Interest Income.
2. Another measure: the number of full-time-equivalent employees.
3. Another: payroll expense ÷ net interest income.
4. Another: Net Income margin (i.e., Net Income ÷ Net Interest Revenue)
5. Another: Average face value of a new loan during a fiscal year.
6. Another: Length of time a credit union has been in business.
7. Another: Number of offices that a credit union has, including its main office..
8. Caveat: test for multicollinearity among the above variables if you use them.
9. Research on commercial banks in the States has found that operating ratios decline as size increases. That means that there are scale economies in banking and, I would assume, credit unions, too. Therefore, I'd be inclined to choose a size-specific dependent variable such as Total Assets.
I hope these ideas are helpful. Please feel free to send me an e-mail, David: [email protected].
Best regards--
Warren
@Gary, Jimmie & Warren: thank you very much for your insights. The aim is to identify a better measure of credit union ecficiency. There are many studies on bank efficiency. However, credit union efficiency has not attracted a lot of attention, yet credit unions contribute greatly to the economic & social welfare of its members and community.
David, I would also urge you to consider why you want to emphasize credit-union efficiency. It goes to that age-old question of which is more important, (a) being effective or (b) being efficient. Well, being effective means doing the right thing, while being efficient means doing things right. The answer is (a) because one can be extremely efficient doing the wrong thing. In the States, we see that in our national government all the time.
I'm not an expert on credit unions, but maybe you find some cues in the literature on micro finance, where, I think, default rates are an important measure. This could actually serve to measure both efficiency (of the institution) and effectiveness (to reach out to the population).
In addition, you might want to include something related to rotation of loans, such as in ROSCAs (rotating saving and credit associations). What is the turnover time, how many loans in one rotations etc.
Hi David,
First of all, I am not expert on credit union. However, I did my MA thesis on banking efficiency and worked in banking industry for more than 4 years. Two most popular method used in banking efficiency is Stochastic Frontier Approach (that one I used) and Data Envelope Approach. You may look at these two (SFA and DEA) whether they are suitable for credit union efficiency too. If you have questions regarding stochastic frontier approach, I am happy to share my thoughts.
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