Domestic Bank Merger and Acquisition in Ethiopia: a prudent strategy for efficiency and synergy gain

Due to the expected Ethiopian government’s economic reforms, liberalization, and deregulation initiatives that might follow the country’s continued effort to join the WTO, industry shocks and bandwagon effects may trigger merger and acquisition waves in the banking sector. The current study analyzes the potential strategic and technical efficiency gains from potential domestic bank merger and acquisition (M&A) initiatives in Ethiopia. All the seventeen domestic banks operating in the country from 2013-2017 are part of the study. Input-oriented CRS-DEA and Bootstrapped Panel Tobit regression models were employed to analyze the overall scale efficiency gains among 664 hypothetical merger possibilities. Ownership structure and bank size were used to set context variables. The state-owned banks followed by medium, small, and large private banks scored the highest efficiency during the study period. The results indicate large private banks are the preferred banks offering the highest efficiency gains from M&A. Most of the M&A efficiency gains will be outcomes of a learning effect rather than a pure merger signposting little or no resource and service complementarity among merging units. Moreover, only private banks have an opportunity for a full-scale merger. We conclude no clear relationship between bank size and efficiency performance; the scale effect disfavors M&A among merging units, and the internal organizational theory largely explains the potential domestic bank M&A motives.