Policy makers and researchers have long been interested in the cost, productive, allocative, operational and other efficiencies of industries.\u00a0 For a number of reasons\u2014including the notion that banks are vital for a country\u2019s growth and development prospects, and that the safety, soundness and stability of the banking industry is crucial for economic stability\u2014interest in the banking industry has always been paramount.\u00a0 More efficient banks are deemed to supply greater amounts of intermediated funds at more affordable prices, and at the same time remain profitable, safe and sound\u2014a win\u2013win for the wider economy.<\/p>\n
Fortunately, research on efficiency of banks has a relatively long history, dating back to the 1960s.\u00a0 Studies now span many countries, regions and methods.\u00a0 Yet, the experience of Pacific Island Countries remain little known.\u00a0 While the region\u2019s banking history dates back to 1870s, is widespread with foreign banks, particularly Australian, and the quality of regulatory practices equal the world\u2019s best, policy makers remain relatively ill\u2013informed with respect to how far the banking industry can be expected to increase its outputs by simply becoming more efficient, without absorbing additional resources, increasing costs, and becoming less stable.<\/p>\n
Nonetheless, this huge gap in the literature is gradually being filled.\u00a0 A recent joint Griffith\u2014Reserve Bank of Fiji study, forthcoming in the Journal of the Asia Pacific Economy<\/em>, uses Fiji as a case study to provide fresh evidence on how efficient the PICs banking systems might be.\u00a0 It is the first study to estimate technical efficiencies and total factor productivity growth and its components, using a distance function stochastic frontier approach and three single-output models.\u00a0 The study finds that there is substantial scope for improvement of productivity and efficiency, especially in producing more deposits with the same level of inputs such as general expenses including labour, and capital.\u00a0 For small island developing economies such as Fiji and the rest of the region, with their unique and disadvantaged socio-economic conditions, more savings would be indeed be useful for economic growth and development as well as enhancing prosperity and reducing poverty.\u00a0 There is scope for Fiji\u2019s banking system to mobilise more savings without absorbing more resources, increasing costs, compromising profits or becoming less stable.\u00a0 It appears also that banking institutions in Fiji have limited exposure to global financial markets compared to institutions in other parts of the world and thus efficiencies have not really been affected by the recent global financial crisis.<\/p>\n