Technical and scale efficiency of Tanzanian saving and credit cooperatives

The financial sector plays a critical role in economic growth and economic development (Beck & Levine 2004; Levine 1998). However, the impact of the financial sector on economic growth is realized if the sector is efficiently managed and well monitored. The corollary to this is that if the financial sector is not effectively monitored and regulated it may lead to economic crisis. As argued by Sufian (2011) the health of the financial sector is critical for the health of the economy at large. Given the relationship between the financial sector development and economic growth, knowledge about the efficiency of financial institutions and the underlying factors that influence efficiency is crucial. Such knowledge is necessary to provide insights for managers, regulators, policy makers and other stakeholders to formulate policies to improve the efficiency of the financial sector. Despite the importance of knowledge on health industry as articulated above, there is paucity of empirical literature on the performance of financial cooperatives in developing countries and Tanzania in particular. Thus, the objective of this paper is to empirically analyze the efficiency of Tanzanian Saving and Credit Cooperatives. Efficiency analysis was decomposed into three dimensions to explore possible sources of inefficiency. The first dimension was technical efficiency, which explored the overall effectiveness of transforming the productive inputs into desired outputs compared to the data-driven frontier of best practice. The second dimension was pure technical efficiency, which captured managerial efficiency in the intermediation process. The third dimension was scale efficiency, which explored whether firms were operating in an optimal scale of operation. The study used a sample of 103 audited financial statements during 2011. Data envelopment analysis was employed to explore the efficiency scores. The results show that average scores are 42%, 52% and 76% for technical, pure technical and scale efficiencies respectively. Since most of the inefficiencies are either technical or scale in nature, the study recommends increasing the operating scale for smaller firms. Firms operating beyond the optimal scale may need to downsize. Also the managers from technically inefficient firms should reduce the wastage of the productive resources by utilizing their inputs more efficiently.