Measuring Cost Efficiency and Productivity Change of Commercial Banks in Pakistan, 1991-2000

Abstract

The banking sector in Pakistan experienced different reforms from time to time, but specially during 1990's decade. This study explores the efficiency, performance and productivity growth of commercial banks in Pakistan over 1991 - 2000 period. After collection of data from the annual reports of the banks, input/output variables were defined under intermediation approach. The nonparametric model DEA was used to estimate the cost efficiency, allocative efficiency, technical efficiency, pure technical efficiency, and scale efficiency scores of each bank. This model was employed separately on ownership (i.e. stateowned, private, and foreign) basis and on pooled sample data on year base. It was statistically justified the pooling of data of all commercial banks. The results of DEA model show that the commercial banks in Pakistan have to improve their efficiency, as their average cost efficiency score is very low from the world cost efficiency level. Results show that that the main source of inefficiency is the allocative inefficiency rather than the technical inefficiency, which is mainly due to the regularized banking sector in Pakistan. It is revealed that the foreign banks are the most efficient banks in Pakistan, while state-owned banks are the least efficient. The private banks are performing better than the state-owned banks. It is also found that the foreign banks are more scale efficient than their domestic counterparts. The majority of the domestic banks are over expanded. The parametric model results suggest that the inefficiency of the banking sector in Pakistan is due to managerial inefficiency rather than random error. Thus it indicates that the DEA results could be relied upon. Non-parametric Malmquist productivity index suggests that the productivity of commercial banks decreased by 1.8% per annum.