Received: 11 June 2020
Revised: 30 June 2020
Accepted: 25 July 2020
DOI: 10.1002/pa.2334
ACADEMIC PAPER
An evaluation of commercial banks performance in Pakistan: A
comparative analysis
Fahad Najeeb Khan1 | Riffat Shaheen2
Muhammad Usman Arshad4,5
1
Noon Business School, University of
Sargodha, Sargodha, Pakistan
2
School of Economics & Management, Wuhan
University, Wuhan, China
3
Faculty of Management Sciences, Foundation
University Islamabad, Islamabad, Pakistan
4
Department of Commerce, University of
Gujrat, Gujrat, Pakistan
5
School of Finance, Central University of
Finance and Economics, Beijing, China
|
Ajmal Waheed3
|
This study examines the efficiency level of public, private, and foreign banks in
Pakistan during 2014–2017 in order to identify the most efficient type of banks on
the basis of ownership. The study uses data envelopment analysis methodology.
Findings indicate that the efficiency of private and public banks is satisfactory, but
they are not fully efficient and there is a scope for improvement in the performance
of these banks. The private and public sector banks are equally efficient. Results further show that foreign banks are very efficient and can be used as a benchmark for
public and private banks in Pakistan.
Correspondence
Riffat Shaheen, School of Economics &
Management, Wuhan University, Wuhan,
China.
Email: shaheenriffatms13@gmail.com
1
|
I N T RO DU CT I O N
industrialization of the country which is necessary for economic
development these days (Akhtar, 2002).
Every organization has certain goals and to achieve these goals, it per-
According to Friedman (1948), in a country's economic develop-
forms certain activities. To meet the goals, the activities must be per-
ment, monetary policy plays an important role. Monetary policy is
formed in an efficient manner. But what efficiency means? How
defined as a country's central bank's policy regarding interest rate and
efficiency is measured? These questions need to be answered. A very
money supply. Central bank influences the price level through this
significant role is played by commercial banks in a country's economic
policy. Central bank modifies bank rate (interest rate at which central
development. It will not be wrong if they are called backbone of the
bank give loans to commercial banks) to influence money supply in a
country's economic system. For a developing country like Pakistan,
country.
their role becomes more important. Due to their importance in the
Friedman (1960) argued that to maintain low inflation and stable
economic development, the performance measurement of these
output growth, monetary supply must be increased at a low constant
banks is necessary. Commercial banks play a role of intermediary
rate. Monetary policy can be implemented with the help of all com-
between the demanders and savers of funds (Ahmed & Ahmad, 2016).
mercial banks. Therefore, in a country's economic development, an
They use the customers' deposits for advances to businessmen and
important role is played by commercial banks in this manner.
thus facilitate the economic system. They mobilize people's savings
Commercial banks facilitate the government through providing
from all over the country and provide to businesses for productive
loans both long term and short term by purchasing government
uses. Savings will remain idle if banks do not perform this important
securities like government bonds and treasury bills (T-bills). Govern-
function of capital formation. For a developing country like Pakistan,
ment uses these funds to finance its development projects which
modern and efficient banking system is a pre-requisite (Zaidi, 2006).
ultimately leads to the economic development. These days, com-
Banks create credit in order to provide funds for the development
mercial banks have shifted their focus to digital banking (e-banking)
projects which leads to higher production, sales and employment that
which has greatly facilitated both businesses and general public.
leads to faster economic development. Further, an economy's various
Branchless banking is increasing day by day which leads to greater
sectors get funds from banks and these sectors play an important part
efficiency of these banks as resources are utilized in a much
in a country's economic growth. Hence banks help in the
better way.
J Public Affairs. 2020;e2334.
https://doi.org/10.1002/pa.2334
wileyonlinelibrary.com/journal/pa
© 2020 John Wiley & Sons, Ltd
1 of 8
2 of 8
1.1
KHAN ET AL.
Research questions
|
programming. This second approach is called DEA that yields different
cost efficiencies for banks than the econometric approach.
Following research questions answered by the researchers:
A study by Berger, Hunter, and Timme (1993) used DEA for efficiency of financial institutions. They suggested that better quality of
1. How commercial banks in Pakistan have performed (efficiency)
during the sample period?
2. Is there any difference exist in the performance (efficiency) of private and public sector banks of Pakistan?
3. Which banks are those that can act as a benchmark for other commercial banks?
service for consumers, better price and improved profitability could
be expected for efficient banks. They also found DEA a very useful
technique for banks efficiency evaluation. Banking efficiency measured through DEA can be related to the failure rates. For example,
rate of failure of low efficiency banks is greater than for higher efficiency level banks (Berger & Humphrey, 1992; Cebenoyan,
Cooperman, Register, & Hudgins, 1993; Hermalin & Wallace, 1994)
Berger and Humphrey (1997) conducted a review of 130 studies
1.2
Objectives of the study
|
who considered a sample of financial institutions in 21 countries.
These studies have used frontier efficiency analysis. They found
Objectives of this study are:
69 applications of nonparametric techniques like DEA. This clearly
indicates the usefulness of the DEA technique for financial institution
1. To identify the efficiency levels of commercial banks in Pakistan.
2. To compare the performance (efficiency) of public sector and private sector banks in Pakistan.
3. To identify the benchmark banks in order to improve the performance of inefficient banks.
evaluation like a bank.
Pastor, Pérez, and Quesada (1997) compared the efficiencies of
European and US banks by using DEA and found quite significant differences in efficiencies among different countries banking systems.
For example, Spain, Belgium and France found to have the most efficient banking systems, whereas Germany, UK and Austria found to
This study aimed to measure the commercial banks'efficiency in
have lowest efficiency levels. Scale inefficiencies were also observed
Pakistan and also benchmark them by identifying the most efficient
for German, Austrian and US banking systems while no such scale
bank against which other commercial banks can be compared. For this
inefficiency was observed for UK and France.
purpose, we applied Data Envelopment Analysis (DEA) technique. Our
Maudos and Pastor (1999) used a sample of 14 European Union's
paper is further organized as; Section 2 presents a review of previous
countries, USA and Japan to study the profit and cost efficiency by
literature and proposes a research framework. Methodology is dis-
employing DEA. They found that increased competition in 1990s
cussed in the Section 3. The analysis of data collected conducted in
resulted in gains in profit efficiencyof the European and USA banking
Section 4. The discussion of results and conclusions are included in
system but not in the Japanese banking system. They also found that
Sections 5 and 6 respectively.
if inefficiency were eliminated then similar levels of profitability
among countries would be achieved.
Akhtar (2002) conducted an x-efficiency analysis of 40 commercial
2
|
A REVIEW OF LITERATURE
banks of Pakistan. The input variables used were capital and deposits.
On the other hand, the output variables considered were loans,
In business dictionary, efficiency is defined as a comparison of what
advance and portfolio investment. In findings, the overall efficiency
is actually performed or produced with what can be achieved with
score of commercial banks in Pakistan was found lower than the mean
the same resource consumption, for example labor, time, money etc.
efficiency of world's banks. Also, the productivity of the input of these
In other words, the ratio of output to input over a specified time
banks is found to be lower. The financial instability and poor economic
period is known as efficiency. Commercial banks are considered as
system are the basic reasons for low efficiency of banks in Pakistan as
the life blood of economic system and it becomes very important to
compared to the other banks in the world. As far as Pakistani banks
measure their efficiencies in order to identify areas for improve-
are concerned, Poor management at banks results in lower productiv-
ment. A review of the related literature in this regard is presented
ity of inputs.
as follows.
Shahid, Rehman, Niazi, and Raoof (2010) conducted efficiencies
After the introduction of DEA by Charnes, Cooper, and
comparison of Pakistani Islamic and conventional banks for the year
Rhodels (1978) which was based on the work of Farrell (1957), many
2005–2009. Deposits and capital were taken as the input variables
studies attempted to measure the banks' efficiency by employing
while output variables used were loans, advances and portfolio invest-
DEA. But Sherman and Gold (1985) was a pioneer in the application
ment. Findings show that in comparison to Islamic banks, the conven-
of this method to the banks. They found that meaningful insights pro-
tional banks' technical efficiency (TE) is better. However, both sectors
vided by DEA results that are lacking in other techniques of improving
have shown a healthy competition in term of cost efficiency (CE) and
efficiency.Farrier (1990) compared two techniques for estimating effi-
allocative efficiency (AE). The technology improvement and banking
ciencies. One technique involves the cost frontier estimation; the sec-
reforms are the possible reasons for better TE of conventional banks.
ond involves calculation of a production frontier based on linear
Also, Islamic banking is still in its early ages in Pakistan.
3 of 8
KHAN ET AL.
Usman, Wang, Mahmood, and Shahid (2010) investigated techni-
savings are possible. The use of only 1-year data and the combination
cal efficiency for the period 2001–2008 in Pakistani banking sector.
of input output variables seems to be inappropriate hence banks' effi-
They have used three output variables namely investment, advances
ciency is questionable.
and lending to financial institutions and five input variables namely
Joshi and Bhalerao (2011) used a period of 2008–2010 for effi-
number of employees, operating fixed assets, borrowings from finan-
ciency evaluation of Indian private and public sector banks. They have
cial institutions, deposits and bills payable. Foreign owned banks con-
used input variables including operating expenses, interest expenses,
sidered to be the most efficient with domestic private banks and
deposits and assets. The output variables considered were invest-
state-owned following them. Further, pure technical efficiency found
ments, advances, interest income, and non-interest income. It was
to contribute more towards technical efficiency. And the main cause
found that efficiency of most of the banks is satisfactory. Their aver-
of overall technical inefficiency is scale inefficiency. State owned and
age efficiency is above 80% which shows good performance. Private
domestic private banks face economies of scale problems. Foreign
sector banks have a margin over the minimum efficiency of public sec-
banks are larger in size which contributes to their efficiencies.
tor banks. The inefficient banks have higher deposits and advances.
Ahmed and Ahmad (2016) analyzed the technical efficiency of
Pakistani commercial banks through two specifications of DEA. In the
The non performing loans are in higher proportion in these banks contributing to their inefficiency.
first specification, output considered was profit while lending to financial
Alkhathlan and Malik (2010) used 10 commercial banks of Saudi
institutions, investments and advances were taken as inputs. While in
Arabia as a sample for the year 2003–2008 to evaluate efficiency.
the second specification, output variable was profit again and inputs
Inputs were equity capital, operating expenses and deposits, while
considered include borrowing from financial institutions, bills payable,
advances and loans were the output variables. Findings indicate that
number of employees, deposits and other accounts. In first specification,
the mean efficiency during the year 2015 was 86.17 and 93.97% as
33 commercial banks were included, and 6 banks identified with the
per Charnes–Cooper–Rhodes (CCR) and Banker–Charnes–Cooper
highest technical efficiency score of 1 and the lowest score of 0.011
(BCC) models respectively. Six banks as per BCC Score and five banks
was found for a commercial bank. In second specification, 7 banks were
as per the CCR Score were found on efficient frontier in 2015. Com-
identified with highest technical efficiency score while a score of 0.003
paratively, National Commercial Bank (NCB) was the only inefficient
was found as the lowest score. Commercial banks need to enhance their
bank both in terms of BCC and CCR models.
deposits and reduce bills payable in order to be efficient.
Dhanora, Danish, and Sharma (2020) studied the effect of prod-
Qayyum (2020) investigated financial sector reforms and
uct and process innovation on the productivity of 168 pharmaceutical
Pakistani banking system's efficiency. Output variables used were
firms during 2000–2013 in India using DEA. Findings suggest that
loan, advances and investment while input variables were Deposits,
technological innovation positively influence productivity. However,
Labor and Capital. Findings show that banks' efficiency is improved by
this influence differs with types of technological innovations and also
financial sector reforms. For the year 2005, among 20 banks, 12 banks
ownership structure of firms.Review of literature is summarized in
were positioned on best practice frontier through efficiency analysis
Table 1 given below.
and only one public sector bank belongs to this best practice frontier.
The review of related literature above shows that there are cer-
Financial sector reforms appeared to have positive impact on effi-
tain input and output variables that contribute to the bank's effi-
ciency of banks. Many private banks enter the banking industry which
ciency. The variables most probably used by the researchers as
contributes to the banks' overall efficiency in Pakistan.
input variables include deposits (Ahmed
& Ahmad,
2016;
Frimpong (2010) used a sample of Ghana banks for the year 2015
Akhtar, 2002; Alkhathlan & Malik, 2010; Favero & Papi, 1995;
to study the efficiency. Only four banks were found completely effi-
Frimpong, 2010; Joshi & Bhalerao, 2011; Shahid et al., 2010;
cient while 18 banks were found inefficient in his findings. The effi-
Usman et al., 2010), interest expenses (Athanassopoulos, 1997;
ciency range for inefficient banks ranges from 33 to 89% and the
Ayadi, Adebayo, & Omolehinwa, 1998; Bhattacharya, Lovell, &
average technical efficiency was found to be 74%. The most efficient
Sahay, 1997; Chen & Yeh, 1998; Joshi & Bhalerao, 2011), and oper-
group found was the domestic private banks with an average effi-
ating expenses (Bhattacharya et al., 1997; Joshi & Bhalerao, 2011;
ciency level of 87%. The Govt-owned banks and foreign banks
Mukherjee, Nath, & Pal, 2002). The output variables used by
followed the domestic private banks with an average efficiency level
researchers include loans, advances (Akhtar, 2002; Alkhathlan &
of 72 and 51% respectively. To improve their performance, govern-
Malik, 2010; Chen & Yeh, 1998; Favero & Papi, 1995;
ment owned banks need to use their inputs in more efficient way.
Frimpong, 2010; Joshi & Bhalerao, 2011; Shahid et al., 2010;
Mostafa (2015) used a banks sample of top 50 Gulf Cooperation
Usman et al., 2010) and investments (Akhtar, 2002; Bhattacharya
Council (GCC) to measure the relative efficiency for year 2005. Assets
et al., 1997; Chen & Yeh, 1998; Joshi & Bhalerao, 2011; Shahid
and equity were taken as inputs while return on equity, net profit and
et al., 2010; Usman et al., 2010). The use of the above input-output
return on assets were used as outputs. Findings suggest that signifi-
variables seems to be appropriate as these are considered as the
cant improvements can be made as the results indicate that several
basic determinants of bank efficiency.
Banks's performance is sub-optimal. For possible reduction in the use
of resources, separate benchmarks were derived hence significant
Based on above discussion, we propose our theoretical research
framework given in Figure 1 below.
4 of 8
TABLE 1
KHAN ET AL.
Summary of literature review
Author/Year
Methods
Findings
Charnes et al. (1978)
CRS model of DEA
Authors defined efficiency as outputs to inputs ratio and developed
constant return to scale model of DEA which gives technical efficiency.
Sherman and Gold (1985)
DEA
They were pioneer in application of DEA to the banks. They found that
meaningful insights provided by DEA results that are lacking in other
techniques of improving efficiency.
Farrier (1990)
DEA
DEA yields different cost efficiencies for banks than the econometric
approach.
Berger et al. (1993)
DEA
They found that better quality of service for consumers, better price and
improved profitability could be expected for efficient banks.
Berger and Humphrey (1997)
A literature review
(survey method)
They found 69 applications of nonparametric techniques like DEA out of
130 studies which show its usefulness.
Pastor et al. (1997)
CRS and VRS models of DEA
They compared the efficiencies of European and US banks by using DEA
and found quite significant differences in efficiencies among different
countries banking systems.
Akhtar (2002)
DEA
The overall efficiency score of commercial banks in Pakistan was found
lower than the mean efficiency of world's banks which is due to
financial instability and poor management.
Shahid et al. (2010)
CRS and VRS models of DEA
Findings show that in comparison to Islamic banks, the conventional
banks' technical efficiency is better. However, both sectors have shown
a healthy competition in term of cost efficiency and allocative
efficiency.
Usman et al. (2010)
CRS and VRS models of DEA
Foreign owned banks are considered to be the most efficient with
domestic private banks and state-owned following them. Further, pure
technical efficiency found to contribute more towards technical
efficiency
Ahmed and Ahmad (2016)
CRS model of DEA
Commercial banks need to enhance their deposits and reduce bills payable
in order to be more efficient.
Frimpong (2010)
CRS model of DEA
The most efficient group found was the domestic private banks with an
average efficiency level of 87%. The government owned banks and
foreign banks followed the domestic private banks.
Mostafa (2015)
CRS model of DEA
Findings suggest that significant improvements can be made as the results
indicate that several banks' performance is sub-optimal.
Joshi and Bhalerao (2011)
CRS model of DEA
It was found that efficiency of most of the banks is satisfactory. Their
average efficiency is above 80% which shows good performance.
Private sector banks have a margin over the minimum efficiency of
public sector banks.
Alkhathlan and Malik (2010)
CRS and VRS models of DEA
Findings indicate that six banks as per BCC score and five banks as per the
CCR score were found on efficient frontier in 2015.
Dhanora et al. (2020)
Malmaquist productivity index
Findings suggest that technological innovation positively influence
productivity. However, this influence differs with types of technological
innovations and also ownership structure of firms.
In the above research framework, input and output variables are
independent variables while bank efficiency is a dependent variable.
The input variable, deposits, is measured as money value of deposits
of all types and accounts including saving, current, and fixed deposits.
Interest expenses are measured as the amount of interest payments
on various types of deposits. Operating expenses are measured as all
expenses excluding interest expense. The output variable, loans, is
measured by taking the amount of loans granted to the financial institutions. Advances are measured by the amount of loans made to customers excluding financial institutions. Investments are measured by
FIGURE 1
Theoretical framework
the amount invested in the government and corporate securities.
5 of 8
KHAN ET AL.
Bank efficiency is dependent variable, measured as the ratio of
for the bank size effect on the output to input ratio (Mostafa, 2015).
weighted sum of outputs to weighted sum of inputs.
VRS model provides pure technical efficiency (PTE) for managerial
performance measurement. According to Coelli (1996) based on variable returns to scale (VRS), the input- oriented DEA model is stated as
3
3.1
M E TH O DO LO GY
|
|
follows:
minθ,λ θ,
Data Envelopment Analysis (DEA)
subject to-yi + Yλ ≥ 0,
θxi −Xλ ≥ 0,
N10 λ = 1
The objective of this paper is to identify the most efficient type of
banks based on ownership by examining the efficiency of private,
λ≥0
public, and foreign banks of Pakistan. For efficiency evaluation of
these banks, our study uses DEA model. DEA has been extensively
used in banks efficiency evaluation (Ahmed & Ahmad, 2016;
where N1 is an N × 1 vector of ones.
Akhtar, 2002; Alkhathlan & Malik, 2010; Ayadi et al., 1998; Berger
Our study uses input orientation approach. It means that without
et al., 1993; Berger & Humphrey, 1997; Bhattacharya et al., 1997;
changing the quantities of output, up to what extent input quantities
Chen & Yeh, 1998; Farrier, 1990; Favero & Papi, 1995;
can be reduced (Coelli, 1996).
Frimpong, 2010; Joshi & Bhalerao, 2011; Maudos & Pastor, 1999;
Pastor et al., 1997; Shahid et al., 2010; Sherman & Gold, 1985; Usman
et al., 2010). DEA was used in other areas also like Mohanty, Sahoo,
3.3
Data, sample, and variables
|
and Chaudhury (2020) used it for assessing the macroeconomic performance of India; Tang, Tang, and Lee (2014) for measuring effi-
The Banking Statistics of Pakistan 2014–2017 is used as data source
ciency of provincial governments in China and Sibiano and
for our study .it is published by the State Bank of Pakistan (SBP) and
Agasisti (2013) for Efficiency of public spending on education in Italy.
contains information regarding all commercial banks of Pakistan. Four
Efficiency is defined as the ratio of weighted sum of outputs to
years' data, that is, 2014–2017 is used for analysis. The sample con-
the weighted sum of inputs. Moreover, the DEA is a non-parametric
sists of eight commercial banks (three foreign banks, three private sec-
technique introduced by Charnes et al. (1978) and used for relative
tor banks and two public sector banks). The systematic sampling
efficiency measurement of different decision making units (DMUs).
technique is used for selection of these banks. Table 2 below shows
The decision making unit can be an organization, a department of an
these sample banks.
organization, a bank or a branch of a bank. DEA identifies the most
The determination of input–output variables is the most important
efficient DMU by considering multiple inputs-outputs. DMUs with a
part of DEA which must be selected carefully. The study uses input vari-
score of 1 considered as efficient and are on the best frontier while
ables of deposits (all types of deposits and accounts), operating and
DMUs with a score of less than 1 considered as inefficient. The best
interest expenses. The variables taken as outputs include loans and
frontier DMU acts as a role model for inefficient DMUs.
advances (i.e., lending to financial institutions and advances net)
The DEA technique carries many advantages. Some of the advan-
and investments (government and corporate securities). These variables
tages of DEA are presented here. First, multiple outputs and inputs
are identified by the relevant literature and represent key items deter-
can be easily handled by DEA. Second, if input-output variables in dif-
mining the efficiencies of banks.
ferent units, DEA can still measure the efficiency. For example, one
input variable can be no of employees and another input variable can
be deposits in rupees. Third, for every evaluated DMU, inefficiency
4
|
RESULTS AND ANALYSIS
sources can be analyzed and quantified.
The results from the Data Envelopment Analysis Program (DEAP) version 2.1 are presented in Table 3. Technical efficiencies (TE) for each
3.2
|
Variable returns to scale model of DEA
year are computed for all banks using variables return to scales and
input orientation approach.
The factors including constraints on finance, regulation and imperfect
competition makes
firms unable for operating at optimal level thus constant returns
to scale (CRS) model found to be inappropriate here as scale efficiency
is also included in technical efficiency (Coelli, 1996). Scale effect
means that efficiency level is affected by the firm size. Therefore, this
study assumes variable returns to scale (VRS). The VRS was introduced by Banker, Charnes, and Cooper (1984) and it is based on the
fact that all DMUs are not operating at an optimal level. A VRS allows
TABLE 2
Public, private and foreign banks in Pakistan
Public Sector Banks
Private Banks
Foreign Banks
1. First Women
Bank Limited
2. National Bank of
Pakistan
1. Habib Bank
Limited
2. MCB Limited
United
3. Bank Limited
1. Citi Bank N.A Limited
2. HSBC Bank Middle
East Limited
3. The Bank of Tokyo
6 of 8
Bank Ownership Type
KHAN ET AL.
2014
2015
2016
2017
Average
1. First Women Bank
1.00
1.00
1.00
1.00
1.00
2. National Bank of Pakistan
1.00
0.667
0.410
1.00
0.769
Average
1.00
0.833
0.705
1.00
0.884
1.00
0.585
1.00
1.00
0.896
TABLE 3
the banks
Technical efficiencies of
Public sector banks:
Private banks:
1. Habib Bank Limited
2. MCB Limited
1.00
0.323
1.00
0.69
0.753
3. United Bank Limited
1.00
1.00
1.00
1.00
1.00
Average
1.00
0.636
1.00
0.897
0.883
Foreign banks:
1. Citi Bank Limited
0.848
1.00
0.931
1.00
0.945
2. HSBC Bank Limited
0.977
1.00
1.00
1.00
0.994
3. The Bank of Tokyo
1.00
1.00
1.00
1.00
1.00
Average
0.942
1.00
0.977
1.00
0.980
The average TE for each bank type (including private, public, and
TABLE 4
foreign banks) from 2014 to 2017 is shown in Table 3 above. For pub-
Individual banks ranking
Bank Name
Average Technical
Efficiency Score
for 4 Years
Ranking
and 2016 is 0.833 and 0.705 respectively, indicating that they are not
1. First Women Bank Limited
1.00
1st
fully efficient. The overall average TE for 4 years of public sector
2. National Bank of Pakistan
0.769
5th
banks is 0.884 which is reasonable performance though not on effi-
3. Habib Bank Limited
0.896
4th
cient frontier which means that their performance can be further
4. MCB Limited
0.753
6th
5. United Bank Limited
1.00
1st
6. Citi Bank N.A Limited
0.945
3rd
7. HSBC Bank
0.994
2nd
8. The Bank of Tokyo
1.00
1st
lic sector banks, the average TE in 2014 and 2017 is 1.00 indicating
that they are on the efficient frontier. However, average TE in 2015
improved.
Private Banks also show similar performance with average TE of
1.00 in 2014 and 2016 and 0.636 and 0.897 in 2015 and 2017
respectively. Their overall average TE for 4 years is 0.883 showing a
satisfactory performance during the study period but efficiencies can
be improved here as well.
The average TE score for Public and private banks (Domestic
Banks) is 0.884 and 0.883 respectively for 4 years indicating a very
average TE of 1.00. These three banks appear on efficient frontier
similar performance and hence no significant difference. Even though
hence utilizing their input resources in an efficient manner to generate
private banks are young in age as compared to public banks, but bet-
output. Citi bank, HSBC bank limited, and Habib bank limited have
ter management practices and increased competition has contributed
average TE of 0.994, 0.945, and 0.896 respectively and are ranked
positively to their efficiencies.
2nd, 3rd, and 4th. These three banks performed well during the study
As for as TE is concerned, foreign banks compared to the public
period. National bank of Pakistan and MCB limited has lowest average
and private banks performed well. The average TE is 0.942, 1.00,
TE of 0.769 and 0.753 and are ranked 5th and 6th respectively. These
0.977, and 1.00 in 2014, 2015, 2016, and 2017 of these banks
two banks should take necessary steps to reduce their operating
respectively. The overall average TE for 4 years is 0.980 indicating a
expenses and non-performing loans in order to improve their
very good performance compared to Domestic Banks including public
efficiencies.
and private banks. One important reason behind the better performance is that the interest and operating expenses of foreign banks is
lower compared to public and private banks (Domestic Banks). For-
5
|
DI SCU SSION
eign banks have more experienced and professional management with
highly motivated employees that contribute positively to their
The average TE scores as discussed in the results above indicate that
efficiencies.
the performance of both public and private sector Pakistani banks is
Table 4 above contains the ranking based on average TE score for
satisfactory, but they are not fully efficient as their average TE score
4 years for each individual bank. The United bank limited, the First
is less than 1 which is an efficient frontier in DEA. The basic reason of
women bank limited and bank of Tokyo, are ranked 1st as they have
not having full efficiency of these two types of banks is higher amount
7 of 8
KHAN ET AL.
of non-performing loans, high interest expenses, and high operating
commercial banks while there are several Islamic banks which are
expenses as these banks have a large number of operating branches.
ignored in this study. Small sample and 4-year duration is another limi-
It is found that performance of the two types of banks is similar which
tation of this study.
is consistent with the finding of Joshi and Bhalerao (2011). Large
amount of loans and advances were observed by Joshi and
Bhalerao (2011) in Indian banks and same is the case with Pakistani
6.4
|
Future research
banks. It results in larger amount of non-performing loans being the
basic reason behind the similar result of Indian and Pakistani banks.
In future studies, study duration can be increased to get more accu-
On the other hand, due to their better control over interest and
rate results. Also, sample size can be increased by adding more banks.
operating expenses, foreign banks are very efficient. These banks are
Future researches can use CRS model of DEA as well as input prices
managed by experienced and professional personnel who have con-
to get cost efficiency. Future studies may check how e-banking is con-
trolled the nonperforming loans efficiently. Foreign banks are larger in
tributing towards efficiency of commercial banks.
size which positively affects their efficiency. This study found foreign
banks more efficient than Domestic Banks (including public and pri-
OR CID
vate banks). These finding are consistent with the findings of Usman,
Riffat Shaheen
https://orcid.org/0000-0003-4762-688X
Mahmood,Wang and Shahid et al. (2010).
RE FE RE NCE S
6 | CONCLUSION, POLICY
R E C O M M E N D A T I O N S A N D F U T U RE
R E S E A RC H
6.1
|
Conclusion
This study uses VRS approach of DEA to investigate the efficiency of
private, public and foreign banks over a period of 2014–2017. In order
to improve performance, public and private banks must reduce operating expenses, interest expenses, and inefficient advances and loans.
Public as well as private banks of Pakistan should follow the strategies
used by foreign banks. There is scope for improvement of performance
by managers of public and private sector banks which will benefit both
the employees of these banks and the economy as a whole. For example, better performance will increase the fringe benefits of employees
as well as enhance the gross domestic product of the country. They
should use foreign banks as benchmark to improve their performance.
6.2
|
Policy recommendations
This study recommends foreign banks as a benchmark to domestic
banks as these banks have more professional management that results
in higher efficiency. Further, domestic commercial banks must focus on
reducing non-performing loans in order to enhance their efficiency.
State Bank of Pakistan must implement some strict measures to
observe performance of domestic commercial banks in order to make them
at par with foreign banks. Specially State Bank of Pakistan must focus on
non-performing loans of domestic commercial banks in order to reduce it.
6.3
|
Limitations of the study
This study has used only technical efficiency to measure bank performance and ignored cost efficiency. The study is limited to only
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AUTHOR BIOGRAPHIES
Fahad Najeeb Khan is a lecturer (Finance) at Noon Business
School, University of Sargodha, Pakistan since October 2013. His
research interests are performance evaluation with focus on efficiency through DEA, corporate governance and capital structure.
He has published many research papers both in domestic HEC
recognized journals of Pakistan and in international journals. He is
currently working on several articles for future publication.
Riffat Shaheen (corresponding author) is a PhD scholar at School
of Economics & Management, Wuhan University, Wuhan, China.
Her research interests include corporate finance with the special
focus on CSR, dividend policy, ownership structure and corporate
governance. Her research work has been published in HEC recognized journals of Pakistan. She is currently working on her PhD
thesis and her several articles are in process of publication.
Ajmal Waheed is currently a Professor and Dean at Faculty of
Management Sciences, Foundation University Islamabad. He
enjoys over 32-year experience of teaching/research; have been
teaching several post-graduate-level courses to MBA/MPA/PhD
classes and supervising MPhil/PhD candidates. His research area
is organizational behavior and performance evaluation. He has
published more than 60 articles in well reputed national and international impact factor journals.
Muhammad Usman Arshad is a lecturer at Department of Commerce, University of Gujrat, Pakistan Since 2015. He is currently
doing PhD under CSC scholarship from Central University of
Finance and Economics, Beijing, China. His research interest is in
stock market returns and measurement of performance of corporations. He has published many articles in HEC recognized Pakistani journals and in international journals.
How to cite this article: Khan FN, Shaheen R, Waheed A,
Arshad MU. An evaluation of commercial banks performance
in Pakistan: A comparative analysis. J Public Affairs. 2020;
e2334. https://doi.org/10.1002/pa.2334