Management Efficiency in Minority- and Women-Owned Banks

Iftekhar Hasan; William C Hunter

Conclusion: Management efficiency has always been an important topic in banking research. Previous studies comparing the operating performance of minority- and women- owned banks with that of nonminority banks often reached mixed conclusions. This may have due to the difficulty of identifying groups of minority and nonminority banks that are comparable along such dimensions as size and customer base. This article reports on the results of research which examined differences in the operating performance of minority- and women- owned banks form the viewpoint of production efficiency. Instead of simply comparing the operating performance of a distinct sample of minority- and women-owned banks to a distinct sample of nonminority-owned banks, Hasan and Hunter compared the operating performance of all the sample banks to a set of best-practice banks. This set of benchmark banks represents those institutions that produced their financial products and services at the lowest cost using the most efficient mix of productive inputs or factors of production. Thus, unlike the older literature which suggests managerial inefficiencies for minority-owned banks from simple comparisons of financial ratios, the authors measure such managerial inefficiencies directly from the banks' cost (production) functions. The results indicate that, while banks from both minority- and women-owned and the nonminority categories were inefficient, the average minority- or female-owned bank was significantly more inefficient than the average nonminority bank. Among the sampled minority- and women-owned banks, the women-owned banks were the most efficient. Banks owned by Asian Americans were the least efficient among the minority-owned banks, followed by banks owned by African Americans and Hispanic Americans, respectively. "De novo" status was found to be a key factor accounting for higher levels of inefficiency. One explanation for this finding could be the lack of experience at de novo banks in serving new markets and customer bases. Another factor found to be important was the level of market concentration. The less competitive and more concentrated the bank's local market, the higher its level of inefficiency.

Management Efficiency in Minority- and Women-Owned Banks

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