Do non-interest income activities matter for banking sector efficiency? A net interest margin perspective

PurposeThe purpose of the present paper is to empirically analyze the efficiency of the Thailand banking sector during the period of 1999‐2008.Design/methodology/approachThe efficiency estimates of individual banks are evaluated by using the data envelopment analysis approach. The central tendency and parametric method based on the Tobit regression is employed to investigate the Thailand banking sector's production efficiency while controlling for the potential effects of internal (bank‐specific characteristics) and external (macroeconomic and industry specific) contextual variables. As a robustness check, following Banker and Natarajan among others, the second‐stage regression is also estimated by using the ordinary least square regression method, while the standard errors are calculated by using White's specification to adjust for cross‐section heteroskedasticity.FindingsDuring the period under study, the empirical findings indicate that scale inefficiency outweighs pure technical inefficiency in determining the Thailand banking sector's technical efficiency. The results from the multivariate regression analysis suggest that banks with higher loans intensity and better capitalized tend to exhibit higher efficiency levels. On the other hand, credit risk is negatively related to bank efficiency. The empirical findings suggest that the recent global financial crisis exerts negative impact on the efficiency of Thailand banks. The results indicate that the domestic banks have exhibited higher TE compared to their foreign bank counterparts.Research limitations/implicationsOwing to its limitations, the paper could be extended in a variety of ways. First, the scope of this study could be further extended to investigate changes in cost, allocative, and technical efficiencies over time. Second, future research into the efficiency of the Thailand banking sector efficiency could also consider the production function along with the intermediation function. Finally, investigation of changes in productivity over time as a result of technical change or technological progress or regress by employing the Malmquist total factor productivity index could yet be another extension to the paper.Originality/valueAlthough the literature examining the efficiency of financial institutions with parametric and/or non‐parametric frontier techniques has expanded rapidly in recent times, these studies have been confined to the US banking sector or the banking sectors in the Western and developed countries. However, empirical evidences on the developing countries banking sectors in general and of the ASEAN countries in particular are relatively sparse. The present paper attempted to fill a demanding gap in that case by providing new empirical evidence on the sources and determinants of the Thailand banking sector's efficiency.

Profitability and efficiency of the banking sector significantly contributes to the economic growth and stability. The aim of this paper is to calculate, analyse and discuss profitability and efficiency of the banking sector in the Republic of Croatia for the period 2004-2016, focusing on the segmentation of banks into three groups according to the classification of the Croatian National Bank. Banks' profitability is represented by calculating return on assets (ROA) and return on equity (ROE), while window analysis, form of a data envelopment analysis (DEA), is used to calculate intermediation efficiency. Results indicate that large banks are the most profitable and most efficient banks' group using variable returns to scale (BCC model), while the medium sized banks appear most efficient using constant returns to scale (CCR model). The obtained results allow for an analysis of trends of the banking sector performance and certain recommendations to boost banks' business results are provided.

This paper investigates the X-efficiency of Islamic banks in Pakistan from 2007 to 2020. Researchers aim to determine the efficiency of Islamic banks with respect to the utilization of available resources. The efficiency of the banking sector has been under scrutiny in recent years due to increased competition, deregulation, global financial crises, and the advent of Islamic banking. The study investigates the data of five functional Islamic banks in Pakistan. This study employs the Data Envelopment Analysis (DEA) method to evaluate the efficiency of the Islamic banking sector. The input and output variables are specified using an intermediation approach, in accordance with standard practices. The results indicate that Islamic banks in Pakistan are, on average, relevantly efficient. We found that among the five Islamic banks in Pakistan, the Meezan Bank has the greatest average cost, technical efficiency, and allocative efficiency. It becomes clear that the bank's size and longevity are the primary contributors to its top-tier performance and efficiency metrics. The study's results provide credence to the idea of economies of scale by showing that scale efficiency improves with bank size. These results call for regulatory considerations that acknowledge the influence of bank size on efficiency, suggesting that policies promoting growth might inadvertently enhance the sector's efficiency levels.

In the mid-1990s, East Asian countries have experienced severe financial crisis that were followed by deep economic downturns. A variety of methodologies have been used to explain the Asian financial crisis. However, the impact of the Asian financial crisis of 1997 on the efficiency of the banking sector has not been studied yet. The present article attempts to provide new empirical evidence on the efficiency of the Malaysian banking sector around the Asian financial crisis. The efficiency estimates of individual banks are evaluated by using the non-parametric data envelopment analysis (DEA) method. The results indicate that the foreign banks have exhibited higher technical efficiency compared to their domestic bank counterparts. However, the results suggest that the foreign banks were severely affected by the Asian financial crisis, implying that the foreign banks are not insulated from unexpected events like the Asian financial crisis of 1997.

Purpose – The purpose of this paper is to examine the relationship between banking sector efficiency and economic growth in Africa. Methodology/approach – The paper used the stochastic frontier approach stating the banking sector cost function as a Fourier flexible to estimate bank efficiency. We then used the Arellano–Bond GMM estimator to investigate the relationship between banking sector efficiency and economic growth. Annual data for banking sector financial statements were used in estimating efficiency scores. Findings – The study found banking sector efficiency in the sample to be 69%. We also found a positive relationship between banking sector efficiency and economic growth, confirming the critical role banks play in the economy. Practical implications – Banking sector efficiency score of 69% implies banks in Africa could save up to 31% of their total cost if they were to operate efficiently. Policy direction should therefore focus on policies and incentives that will improve the efficiency of the banking sector and hence economic growth. The study brings to the fore the importance of the qualitative aspect of the banking sector in allocating financial resources in the real economy. Focus in the real economy should not be only on the size of the banking system but also on the quality with which resources are allocated. Originality/value of paper – This study is among the first dedicated solely to African countries. It does set the pace for future research in the area and also confirms in Africa the Schumpeterian hypothesis that the banking sector is key in allocating resources in the real economy.

Diversification plays a vital role in risk management and consequently financial performance of commercial banks. Diversification mitigates systemic risk facing a commercial bank and thus reduces the probability of bank failure. In Kenya, commercial banks have been diversifying their business by increasingly offering new services such as mobile banking, agency banking, bank-assurance, faceless banking and integrating microfinance in their banking system. Diversification by the commercial banks is premised on the need to enhance financial performance. This has mainly emanated from banking industry having undergone numerous regulations regimes which over the years have affected financial performance of these entities. Empirical literature shows that diversification may not always lead to higher financial performance due to increased overheads and exhausted economies of scale. The study sought to determine the effect of diversification on financial performance of commercial banks in Kenya. The specific objectives of the study were to determine the effect of income diversification on financial performance of commercial banks in Kenya, to examine the effect of geographical diversification on financial performance of commercial banks in Kenya and to examine the effect of product diversification on financial performance of commercial banks in Kenya. Secondary data used by the study was collected for five years period (2013-2017 on annual basis). All the commercial banks were studied. Data was analysed using descriptive and inferential statistics and presented in tables and figures. The study found that Income Source Diversification and Geographical Diversification had a positive effect on the financial performance of the commercial banks while the Product Diversification had a negative impact the financial performance the commercial banks. The findings from the OLS regression analysis revealed that the diversification components studied namely product diversification, geographical diversification and income diversification explain up to 13.3% of the variations in return on assets (R2=0.133) and 18.7% of the variations in return on equity (R2=0.187). The study concluded that financial performance of the commercial banks in Kenya can be accounted for by the diversification strategies that have been implemented. It was further concluded that increased formulation and implementation of additional diversification strategies resulted in significant improvement in the financial performance of the commercial banks. The study recommended that managers at the commercial banks to make formulation and implementation of diversifications as a key organizational priority. Before the adoption of any particular diversification, the management of the commercial banks are econcouraged to first determine the suitability of that particular diversification strategies based on the organization structure, culture and policies and the overall intended outcomes. The study recommends that the government and other regulatory bodies to create favourable policies on the implementation of diversifications in commercial banks. This will ensure that there is effectiveness, efficiency as well as consistency in the use and adoption of diversifications by not only the banks but also other organizations in different sectors.

Purpose In an attempt to enrich the literature of the efficiency of financial services sector with holistic perspective, this study aims to empirically investigate the input efficiency of banking and insurance sectors with further probe into Islamic segments of these sectors in Pakistan.Design/methodology/approach This study measures the technical, allocative, cost, and scale efficiencies of banking and insurance firms in our sample using the non-parametric frontier method, data envelopment analysis (DEA).Findings The findings show that, on average, the allocative efficiency of the overall Islamic financial services sector has increased during the period of study and has also remained well above their conventional counterparts. The study also revealed that, insurance sector is more technically efficient than banking sector. Finally, the study also found that overall efficiency of financial sector can also be improved by exchanging experts between two sectors.Originality/value The results of this research study provide empirical findings as to how two segments of Financial Services Sectors had fared in the competitive environment from 2007 to 2015.

In this paper, the authors seek to investigate the nexus between banking sector efficiency and labour employment in South Africa. The Hicks-Moorsteen aggregator functions were used to generate total factor productivity (TFP) efficiency measures for the big-four commercial banks. The authors then used the pooled estimation technique to examine the link between banking sector TFP efficiency and employment. First stage results revealed that the average banking sector TFP efficiency was 68 percent implying that the observed TFP was 32 percent short of the maximum TFP possible using the available technology. Hence, the banking sector has the potential to augment productivity by 32 percent without the need for further input utilisation if they were to operate efficiently. Of paramount importance in the second stage analysis was that the authors found a positive and significant association between banking sector efficiency and national employment, meaning that national employment is influenced, inter alia, by the efficiency with which banks operate. This finding highlights how the enhancement of bank efficiency translates into increased employment in the economy. The authors therefore underscore the need for the banking sector to maintain high efficiency in order to augment efforts to achieve the objectives of the New Growth Path aimed at creating five million jobs in South Africa by 2020. They also advocate for banking sector policies and incentives that are directed at enhancing the efficiency of the banking sector.

Research background: The importance of the financial sector for the real economy has increased as there has been a transition from industrial capitalism to financial capitalism in recent years. The increasing importance of the financial sector is referred to as financialisation, and it is undoubtedly associated with finance, financial operations, or an increase in the importance of profits generated by financial activities. Financialisation is a long‑term process characterised by the growth of the banking sector. Purpose of the article: This article compares the effectiveness of banking sectors in the European Union (EU) countries from the financialisation perspective.
 Methods: The study determined the efficiency of the banking sectors for the 28 EU countries using an input‑oriented, non‑radial BCC model in 2017 and assessed changes in the efficiency of the entities studied using the Malmquist index between 2008 and 2017.
 Findings & value added: With certain outlays and effects, the banking sectors of seven countries were effective in 2017 from the financialisation perspective: Cyprus, Denmark, France, Luxembourg, Malta, Sweden, and the United Kingdom. The effectiveness of individual inputs for the banking sectors from each country was then determined, and benchmark leaders were identified. The analysis of the dynamics of changes in the efficiency of the banking sectors showed that Sweden had the highest values of the Malmquist index between 2008 and 2017 (where efficiency increased by 37.7%).

This article focuses on the efficiency of commercial banks in North Macedonia in the period from 2007 to 2020. The main goal is to assess the relative efficiency of the banking sector as a whole, and more importantly, to evaluate and analyse the impact of mergers and acquisition (M&A) transactions on banks’ efficiency. For this reason, the leading nonparametric methodology Data Envelopment Analysis (DEA) has been employed, i.e., the window DEA model with two input and two output variables on a sample of 13 commercial banks. Based on balanced panel data from the banking sector of North Macedonia, the obtained results show a constant fall of efficiency of the whole banking sector, from 83.33% in 2007 to 70.06% in 2011 and 66.36% in 2020. The results of the M&A transactions case study analysis show that, in general, M&A transactions decrease banks' efficiency, i.e., they do not result in an efficiency increase. The contribution of the study is that it comprises the first study analysing the effects of banks' M&A on bank efficiency in the region of South-Eastern Europe with the application of DEA and thus, it provides valuable information for investors, bank management, M&A analysts, academic members and regulatory bodies.

Banks play a crucial role in developing and least developed economies by facilitating in trade finance. Banks established an important linkage in international trade by guaranteeing international payments and thereby reducing the risk of trade transactions. The Banks in India has witnessed a significant growth, specialization and diversification since the initiation of financial sector reforms in 1991and further slowdown in the economy as a result of global financial crisis in 2008-2009. This study examines the performance of Indian banks using data envelopment analysis. Though, there are large number of literature have been published on banking efficiency, This is an attempt to investigate the impact of global financial crisis on performance of Indian banking sector. The sole objective of this study is to exhibit, utilizing empirical data, the quantum to which the global financial crisis had an impact on the performance of the Indian banking industry. This study gives a comparative empirical analysis of the technical efficiency of Indian commercial banks during pre and post crisis period covering 2005-2012 using non parametric technique i.e. Data Envelopment Analysis (DEA). This period is consisting of pre and post global crisis period which is characterized by far reaching experience of crisis period (2008-2009) and its impact on the efficiency of the Indian banking sector. Overall, the results reveal that the effect of international financial crisis on the Indian banks has not been significant. Instead, the analysis reveals there is a statistically insignificant improvement in the efficiency of Indian banks’ following international financial crisis. Furthermore, the paper shows that the commercial banks have a high degree of resilience and stability.

Efficient and smooth performance of the banking sector is very important for the functioning of the financial system of an economy as it affects economic stability and growth. Along with conventional banking systems, Islamic banks are playing an increasingly important role and have become an essential part of the financial structure of many Muslim and non-Muslim countries. Accordingly, efficiency and productivity measurement of Islamic banks has a great importance in scientific research. Based on the literature review, this paper analyzes two concepts of performance evaluation—efficiency and productivity of Islamic banking sector using Data Envelopment Analysis method. As a nonparametric scientific method, DEA together with Malmquist total factor productivity index has become one of the most widely used methods to evaluate the relative efficiency and productivity of various financial institutions, including Islamic banks. The purpose of this paper is to present the most important studies on performance management of banking sector in Islamic countries. We have conducted a comprehensive literature review on the methodology and studies on measuring bank performance with emphasis on DEA method. The results of the efficiency and productivity assessment of the Islamic banking sector show a range of inputs and outputs used in DEA models, their relative efficiency results and productivity changes. This paper provides the basis for further empirical research of the relative efficiency or productivity growth of the Islamic banking sector.

PurposeThe purpose of this paper is to investigate the effect of revenue diversification, non-interest income and asset diversification on the performance and stability of the Gulf Cooperation Council (GCC) conventional and Islamic banking systems.Design/methodology/approachThe authors implement a panel of 69 conventional and Islamic banks listed in six GCC markets over the period of 2003–2015, using the System Generalized Method of Moments methodology.FindingsNon-interest income diversification has a negative impact on GCC banks’ performance, while asset-based diversification affects banks performance positively. However, Investors tend to penalize the value of the banks’ assets, which are highly diversified. Government intervention, lack of competition, legal protection and high control of Central banks on GCC banks’ have positive impact on performance. Contrary to the results on conventional banks, asset diversification adds value to Islamic banks. Overall, both banks’ revenue and non-interest diversification have negative impact on GCC banks’ stability, while asset diversification improves Islamic banks’ stability.Research limitations/implicationsThe analysis is limited to a sample of banks, which are listed in the GCC stock exchanges. The lack of data on private and foreign banks operating in the region made the analysis and, consequently, the results specific to shareholding companies. Also, the authors’ measures of bank stability might not be appropriate to use for Islamic banks, given their banking models implemented.Practical implicationsResearch results provide important implications for regulators, bank managers and policy makers, as to the expected ways to support economic diversification through bank diversification strategies.Originality/valueUnlike related studies, the authors’ sample of homogeneous banks has a market structure that is different from the samples in the literature covering either developed countries or heterogeneous samples from both developed and developing countries. Furthermore, using an efficient econometric methodology, the authors deal with two types of banks: conventional banks and Islamic banks. The research determines which type of bank is more able to benefit from different types of diversification. Unlike previous research, this research explores the sensitivity of the results both to the regulatory environment of the GCC market and to general market conditions.

The paper aims to analyze the productivity and efficiency of banking sector in Nepal. Using systematic random sampling, 20 banks including both commercial and development are selected. The 180 observations of nine year’s panel data from FY 2006/07 to FY 2014/15 has been used. Stochastic Frontier Approach is used taking three input variables i.e. capital, deposit and human resource cost, and one output variable i.e. loans and advance of sampled banks for analysis. The study found that the productivity of human resource, deposit and capital is significant. The joint venture banks are the most efficient than private and Government owned banks. The commercial banks are more efficient than development banks. The study has important implications for the policy makers to take corrective actions for improving the productivity and efficiency of banking sector in Nepal. Keywords: Productivity, Efficiency, Stochastic Frontier approach, Panel data, Banking sector

The present paper examines the impact of mergers and acquisitions on the technical efficiency of the Malaysian banking sector. The analysis consists of three stages. Firstly, by using the Data Envelopment Analysis (DEA) approach, we calculate the technical, pure technical, and scale efficiency of individual banks during the period 1997-2003. Secondly, we examine changes in the efficiency of the Malaysian banking sector during the pre and post merger periods by using a series of parametric and non-parametric univariate tests. Finally, we employ the multivariate regression analysis to examine factors that influence the efficiency of Malaysian banks. Although the merger program was unpopular, perceived by the market as impractical, and controversial, the empirical findings from this study suggest that the merger program among the Malaysian domestic commercial banks was driven by economic reasons.–