An empirical investigation into technical efficiency of commercial banks in Bangladesh using stochastic frontier approach

Abstract

The article investigates the technical efficiency of the state-owned, conventional commercial and Islamic commercial banks in Bangladesh over the period 2009 – 2014. The paper employs parametric stochastic frontier approach (SFA) to estimate technical efficiency of 19 commercial banks comprising 4 state-owned, 10 conventional commercial and 5 Islamic commercial banks. The findings of the paper show that average technical efficiency scores of state-owned banks, conventional private banks and Islamic banks are 0.7410, 0.9157 and 0.9640 respectively. This implies that state-owned, conventional private commercial and Islamic commercial banks in Bangladesh have experienced inefficiency of 25.90 percent, 8.43 percent and 3.60 percent respectively. Results indicate that commercial banks in Bangladesh have wasted, on average, 12.64 percent resources which could be saved to produce the same level of output. The efficiency results suggest that there are enough rooms for advancement in technical efficiency across all types of commercial banks in Bangladesh by refining managerial performance.