Abstract:
Studies on performance and risks of Tanzanian commercial banking have become a
very important issue since they started to experience challenges after liberalisation.
From an empirical viewpoint, very few studies were done on performance, especially
on stochastic frontier with profitability. Studies on the relationship between
performance and risks are also very limited, and there is lack of study on indirect
influence of the instrument to performance and risks. This study aims to examine the
commercial banks‟ performance, simultaneous influence of the risks and
performance and indirect influence of the instruments to performance and risks. The
performance under examination is stochastic cost and revenue frontier, and return on
assets and equity while risks are financial and operational. Instrumental variable
estimation is utilised to solve simultaneous equations. Afterward, derivatives are
applied to find indirect influence of instruments to performance and risks. Using 21 commercial banks from 2003 to 2012, the results of the study prove that profitability
is unstable where stochastic cost performance declines where stochastic revenue
performance increases for an individual bank over the years. Results also prove that
small, foreign and private banks have lower profitability than large, local and
government banks. Large, foreign and government banks are more revenue efficient
than small, local and private banks; small, foreign and private banks are more cost
inefficient than large, local and government banks. Moreover, the results verify
performance and risks have a simultaneous relationship.
