Abstract
The study employs data envelopment analysis to a panel of commercial banks operating in Pakistan for a period 2001 – 2008 in order to measure the technical efficiency of banks. Technical efficiency is then broken down into pure technical and scale components. We divide banks into three categories for analytical purposes: state owned banks, domestic private banks and foreign owned banks. We find foreign owned banks to be the most efficient, followed by state owned banks and domestic private banks are found least efficient. Further it is found that pure technical efficiency contributes more towards technical efficiency and banks are faced with serious scale problems. The scale inefficiency is found to be the main source of overall technical inefficiency. We observe an increasing trend in pure technical efficiency whereas an opposite trend is found in scale efficiency during the sample period.
Highlights
Financial sector plays a significant role in the economic development
From the table 3, we can observe that technical efficiency over the entire period is 0.80, which indicates that banks could have saved 18% of inputs in order to produce the same level of output
A possible reason for lower efficiency of domestic private banks is that several new private banks entered the market during the sample period, these banks are smaller in size and they are in expansion phase
Summary
Financial sector plays a significant role in the economic development. Financial sector of Pakistan consists of central bank, commercial banks, specialized financial institutions, insurance companies, stock exchanges and development finance institutions. Commercial banks are most important component and play a crucial role in the financing of economy. Commercial banks mobilize the savings and play a vital role in enhancing the productive capacity of the economy. The banking sector of Pakistan was nationalized in 1974 and since it was dominated by government ownership with a minority share of foreign banks until the beginning of financial sector reforms in early 1990s. Government of Pakistan decided to undertake financial sector reforms on the advice of IMF and World Bank. The immediate objectives of reforms were restructuring of nationalized commercial banks, improving the supervision of financial institutions and licensing of new private banks.
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