Estimating Cost Efficiency Function and Market Power Indicators of Commercial Banks: An Empirical Study of Iraq

Even though the commercial banks in Iraq faced various issues, especially after the banking sector in Iraq gained recognition in 2004. The scarcity of empirical evidence on the real issues facing the banking sector makes it difficult for decision-makers and policymakers to take adequate measures to address potential problems. This paper contributes to the empirical literature by measuring and analyzing cost efficiency in addition to the Lerner index to measure the power of the banking market in Iraq. A sample of panel data is utilized from 20 Iraqi commercial banks for the period 2010-2020. The data envelope analysis DEA is used to measure banks’ cost efficiency. The empirical results gave evidence of a decrease in the price cost efficiency index in the banking sector during the transitional period, and the Lerner index gave negative results, which is an indication of the decline in the market power of Iraqi banks. This paper suggests that studies should be expanded to measure the power and weaknesses of the banking sector, which led to a decrease in the cost-price efficiency and the strength of the behavior.