Measuring the Efficiency of the Banking System of the Republic of Azerbaijan during the Devaluation Period

Abstract

Between 2011 and 2016, global oil prices experienced a significant decline, leading to two major currency devaluations in Azerbaijan in 2015, which in turn had a profound impact on the country's economy. This study aims to evaluate the efficiency of the ten largest Azerbaijani banks by assets in 2016, specifically in the aftermath of these devaluations. To achieve this, we employ the Data Envelopment Analysis (DEA) method using the CCR model, which operates under the assumption of constant returns to scale. The choice between an input- or output-oriented approach is contingent upon the data structure of the Decision-Making Units (DMUs). Since the CCR model assesses total efficiency, the efficiency scores of all DMUs fall within the range of 0.0 to 1.0, with the upper efficiency limit in DEA established at 1.0. The analysis incorporates three input variables—Total Assets, Total Capital, and Interest Expense—alongside two output variables—Interest Income and Net Profit—extracted from the annual financial statements of each bank.
The findings reveal that, in the period preceding the devaluation, the banks with the lowest efficiency scores were Bank of Baku, Unibank, and Bank Republic, whereas the highest efficiency indicators were observed exclusively in Pasha Bank and Turan Bank. However, when examining the period during and after the devaluation, two of the four most efficient banks remained Pasha Bank and Turan Bank. Notably, it is unsurprising that Bank Republic and Bank of Baku, which had demonstrated the lowest efficiency levels prior to the devaluation, emerged among the most efficient banks in the post-devaluation period.