Using the Stochastic Frontier Analysis Model to Assess Banking Efficiency in Iraq

This paper aims to investigate the banking efficiency of Iraqi private banks using the stochastic frontier analysis model. The SFA model was employed as a tool that has its supporters, in addition to its special advantage, which is the ability to form a model that explains the relationships and determinants of inefficiency in a single stage. This model is used to measure the level of technical and allocative efficiency, thus estimating economic efficiency. The study examines the efficiency accomplishments of 15 Iraqi commercial banks, using data extracted from their annual reports from 2016 to 2023. The results indicate that the Commercial Bank of Iraq is the most effective, while Mosul Bank for Development and Investment is the least effective. The results also show that the variables’ value of deposits, capital, and administrative costs have an impact on the efficiency of banks’ investments. The results also indicate that variable administrative costs have a significant impact on the efficiency of banks’ loan operations. At the same time, deposits and capital have a minimal impact on the efficiency of loans. This study fills a gap in the existing financial literature by examining technical efficiency in Iraqi commercial banks, particularly through the use of stochastic frontier analysis. The study contributes to the literature on commercial bank performance, particularly in developing countries, by utilizing the SFA approach to assess the efficiency of Iraqi commercial banks. This approach enables a comprehensive examination of technical efficiency, taking into account exogenous shocks, omitted variables, and measurement errors.