An Analysis Of The Relationship Between Performance, Financial And Operational Risks In Tanzanian Commercial Banks

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.