Higher Profit Efficiency Research Articles

A Study on The Cost And Profit Efficiency of Islamic and Conventional Bank Islamic Windows in Oman: A Proposed Framework

Objective: This study aims to analyze the efficiency of Islamic and conventional banks and their respective Islamic windows in Oman in terms of costs and profits. Theoretical Framework: The research employs a framework that examines cost and profit efficiency within the banking sector, contrasting the performance of full-fledged Islamic banks and Islamic windows of conventional banks. This framework also investigates the impact of bank-specific variables on efficiency levels. Method: Using empirical data from the Omani banking sector, the study quantifies efficiency by analyzing bank-specific variables such as capitalization, profitability, operational costs, and loan activity. The comparison includes both Islamic banks and the Islamic windows of conventional banks as of the end of the third quarter of 2022. Results and Discussion: The findings reveal that, overall, banks in Oman are more efficient at generating profits than controlling costs. Conventional banks, on average, demonstrate higher efficiency in both cost and profit metrics compared to Islamic banks. There exists a positive correlation between both types of efficiencies and factors like bank capitalization and profitability, while a negative correlation is evident with operational costs. Furthermore, increased loan activity is associated with higher profit efficiency but adversely affects cost efficiency. Research Implications: These results underscore significant efficiency disparities between Islamic and conventional banking sectors. They highlight the need for Islamic banks to enhance their cost management strategies without compromising profit generation, leveraging the benefits derived from their association with parent conventional banks. Originality/Value: The study contributes to the literature by providing a comparative analysis of cost and profit efficiencies in Islamic and conventional banks, with a particular focus on the unique market dynamics of Oman. This research is valuable for stakeholders in the Islamic banking industry, offering insights into leveraging existing infrastructures and enhancing operational efficiencies.

Is cloud computing the digital solution to the future of banking?

This study investigates the impact of banks’ strategic move to cloud computing on bank performance and risk-taking. Based on a novel index of banks’ exposure to cloud computing, we find that banks’ adoption of cloud computing is associated with lower cost efficiency, higher profit efficiency, and greater operational risk using data on Chinese banks over the period 2008–2019. We also find that cloud computing interacts with other newly emerging technologies, leading to synergy gains in cost efficiency and operational risk control but with a substitutive effect on profit efficiency from blockchain. The findings are of timely policy importance and practical relevance for regulators, policy-makers, and bank managers.

Revisiting earnings quality and bank efficiency among East African developing economies: do systemic banking and financial crises matter?

PurposeIn this paper, the authors investigate whether the systemic local banking crises (LBCs) and global financial crisis (GFC) impact the association between bank profit efficiency and earnings quality in developing economies.Design/methodology/approachUsing panel data spanning 29 years over the period 1991–2019 for 169 banks drawn from five East African countries, the authors perform difference-in-difference multivariate analyses using the generalised method of moments (GMM) system estimator on a sample consisting of 2,261 bank-year observations.FindingsThe results, which are robust for endogeneity and other checks, show that banks with higher profit efficiency consistently report higher quality earnings. The authors further establish that whereas systemic LBCs contribute negatively to bank earnings quality, the GFC tends to have a positive impact. These results are upheld when the joint impacts of both systemic LBCs, GFC and profit efficiency on earnings quality are considered. The positive influence of profit efficiency and GFC on earnings quality is pronounced under income-decreasing earnings management. The impacts of profit efficiency, LBCs and GFC on earnings quality appear to be non-monotonic and vary across the sampled countries.Research limitations/implicationsThe study's findings are based on banks in five developing countries within a regional economic bloc. Additional studies could focus on other economic blocs for enhanced generalisability of the findings. In addition, some of the variables examined are studied at bank-level, while other variables are at country-level. Finally, the study establishes an association between the variables of interest, and this does not necessarily imply causation.Practical implicationsThe results provide useful insights to bank regulatory and supervisory agencies on the need to exercise increased risk-based scrutiny over bank loan loss provisioning and minimum loan loss reserve requirements. From an audit perspective, auditors need to be cautious and apply an enhanced risk-based audit especially when auditing banks during and after a financial, banking or systemic crisis. Credit rating agencies need to pay closer attention to the LLPs of distressed banks. Finally, bank investors and customers should be cautious when using bank financial statements, since bank managers of poorly performing banks might engage in aggressive earnings management.Originality/valueThe study is perhaps the first to examine the joint effects of systemic LBCs on the association between bank profit efficiency and the quality of earnings in a larger dataset of banks in a developing regional economic bloc. The authors also employ the GMM system estimator in the modelling, which helps address some weaknesses in prior studies.

The role of fixed cost and non-discretionary variables in fisheries: The case of South Australian rock lobster

Fishing industry sustainability matters for policy-makers and communities as well as the industry itself and understanding profitability is an important component of long-run viability. Our analysis investigates the effects of key fixed and non-discretionary inputs, vessel size and biomass, on profits. We first set up a theoretical model with an input that is fixed in the short-run but that can be used with a variable input at sub-optimal capacity. We use this model to get theoretical insights and predictions for the impact of exogenous changes in biomass, output price and vessel size on profits. We subsequently conduct an empirical investigation to gain an understanding of the effects of these non-discretionary factors on profit efficiency. In particular, we apply a truncated regression with bootstrap methodology to data on individual fisher profit efficiency from the South Australian Rock Lobster Fishery. The non-discretionary variables we consider are biomass, fishing zone, quota management, vessel age, vessel length, engine age, electrical equipment age, and exchange rate. We find evidence that increased biomass and quota management are associated with higher profit efficiency, exchange rate appreciation is associated with lower profit efficiency, and vessel characteristics have limited effects.

Ownership and bank efficiency in Africa: True fixed effects stochastic frontier analysis

This paper investigates the effects of ownership patterns on banks’ cost and profit efficiencies taking a sample of 607 commercial banks operating in 53 African countries during the period 2005–2015. Using pooled and modified true fixed effects (TFE) stochastic frontier panel approaches, we obtain two principal results. First, foreign-owned banks are not more profit or cost efficient than their domestic peers. Second, privately owned banks outperform state-owned banks. These findings result not only from bank-level inefficiencies but are explained by bank-level characteristics and macroeconomic conditions. Specifically, larger, older, and listed banks are associated with higher profit efficiency. This study also reveals that ownership concentration (blockholding) has adverse effects on the efficiency of banks.

Determinants of Firms’ Efficiency: Do Innovations and Finance Constraints Matter? The Case of European Smes

This paper aims at investigating the relationship between firms’ profit efficiency, access to finance and innovation activities. We enrich our understanding on firms’ performance by adopting the stochastic frontier approach (SFA), which allows us to estimate profit functions and to obtain efficiency scores for a large sample of European firms. We pioneer the use of a novel dataset that merges survey-based data derived from the ECB Survey on access to finance for enterprises (SAFE) with balance sheet information. Our evidence documents that credit constrained firms display an incentive to improve their efficiency in order to increase profitability. Among firms that have embarked in product innovation, those in the industry and high-tech sectors see their effort translated in higher profit efficiency. From a policy perspective, our results could help to better understand the link between innovation, financial constraints and efficiency, which goes beyond the idea that easier access to finance is the panacea to get higher profit efficiency. JEL Classification: D22, D24, L23, O31, C33

General Marxism by Production Dimension Model, Production Evolution, and Individualism-Collectivism Duality

In this paper, classical Marxism as special Marxism for the mid-nineteenth century is broadened and updated into general Marxism for the twenty-first century. General Marxism includes the 5W1H production analysis for all aspects of production and the individualism-collectivism duality for the individualistic Western civilization originated from the Middle East and Greece and the collectivistic Eastern civilization originated from India and China. The 5W1H production analysis consists of when (stages) to produce for the production evolution and what (types), how much (energies), why (purposes), who (people), and where (places) to produce for the production dimension model based on the Hofstede cultural dimension model. In the statistical analysis, the indexes in the production dimension model derived from the indexes in the Hofstede model correlate well with the observed Democracy Index (R2 = 0.4) and the GDP Growth Rate (R2 = 0.8). The production evolution has the interdependent individualism-collectivism at the beginning (hunter-gatherer) and the end (eusocial democracy) and the split individualism-collectivism in between (pastoral-agrarian and West-East). The first five stages of the production evolution match the five modes in special Marxism. In the twentieth century, class conflict in the mid-nineteenth century (Marx’s time) turned into class mobility in the true democratic governments (individualistic individual liberal democracy for individual liberty in the West and collectivistic common professional democracy for common wellbeing in the East) working for all people. In the twenty-first century, through increasing globalization in trade and investment, the individualistic West depends on the collectivistic East for consolidative production type from low-profit development, supply chain, economy of scale, and ration, while the East depends on the West for adventurous production type from high-profit invention, productivity, efficiency, and marketing. The result is the interdependent individualism-collectivism to bring about eusocial democracy based on interdependent division of labor between individual liberal democracy and common professional democracy in the stable interconnected world.

Privatization and Profit Efficiency: Evidence from Commercial Banks of Pakistan

This paper investigates the profit efficiency of commercial banks where the banking sector has completed more than two decade of changeover from nationalization policy to privatization and restructuring policy by employing stochastic frontier true effect and true random effect models. Intermediation approach has been used to choose input and output variables of banks. A balanced panel data of 22 commercial banks of Pakistan over the period 1995-2014 have been used for the empirical analysis. The paper found that commercial banks are on average 73% profit efficient. However foreign banks report high profit efficiency score followed private domestic banks and then state owned banks. We also compared the cost and profit efficiency of commercial banks and found that commercial banks are more cost efficient than profit efficient.

The openness of China’s insurance industry and the efficiency of domestic vs. foreign life insurers

We study the cost and profit efficiencies of life insurers in China from 2009 to 2013, a period when China fully opened its insurance market to foreign insurers. Further, we compare efficiency disparities between domestic and foreign life insurers and study the influences of firm characteristics on them. We find that foreign life insurers are more cost efficient than domestic life insurers, whereas mean profit efficiency of the former is slightly lower. In addition, domestic life insurers are advised to decrease the rate of scale expansion and to recruit more highly educated employees in order to narrow down the cost-efficiency disparity. Meanwhile, foreign life insurer advantages in terms of product diversification, employee quality, and equity adequacy do not help them achieve higher profit efficiency. We recommend that foreign life insurers expand their scale through merges and acquisitions and Internet platform in order to reap the benefits of the revenue scale economy.

Income diversification and bank efficiency in an emerging market

Purpose– The purpose of this paper is to explore the non-linear relationship between income diversification and efficiency of Ghanaian banks within the universal banking era.Design/methodology/approach– The stochastic frontier analysis (SFA) technique is employed on annual data of 26 Ghanaian banks from 2003 to 2011 to estimate cost and profit efficiency scores. In the second stage analysis, a tobit regression model is estimated to examine the empirical effect of diversification into non-interest generating activities on estimated cost and profit efficiency scores while controlling for other bank specific characteristics.Findings– The findings of the SFA reveal high levels of efficiency in cost compared with profit to reflect high inefficiencies on the revenue side. An analysis of efficiency scores by two categories of bank size suggests that large banks have high cost and profit efficiency compared to small banks. A non-linear relationship is found between income diversification and efficiency while size was also found to be important in enabling banks exploit the potential benefits of income diversification.Research limitations/implications– This study focuses on one banking market in Africa. A comparative analysis in a cross-section of banking markets in Africa will be useful to bring robustness to the findings of this study.Practical implications– The findings of this study provides useful insights for management on the best corporate model in ensuring that diversification activities are efficiency-enhancing.Originality/value– This study presents the first empirical evidence on the non-linear relationship between efficiency and income diversification in emerging banking markets in Africa.

La Dolce Vita in Japan: The Effect of Bank Mergers on Corporate Governance

This study examines whether bank mergers change the relationship between market power and efficiency. Using two-stage least-squares instrumental variable estimation to address potential endogeneity between market power and efficiency, we confirm that market power is associated with higher profit efficiency. That analysis is then extended to examine how the relationship between market power and efficiency changes after bank mergers. The results are striking. The relationship between profit efficiency and market power becomes negative after banks merge. This effect is most significant for large and mega bank mergers, which experience significant increases in market power after merger. The increase in market power that accrues due to bank mergers does not lead bank managers to reap potential monopoly profits and boost efficiency. On the contrary, there is evidence that bank managers exploit their higher market power to pursue la dolche vita, or “the sweet life”.

Impact of Environmental Factors on Profit Efficiency of Rice Production: A Study in Vietnam-s Red River Delta

Environmental factors affect agriculture production productivity and efficiency in which result in a change of profit efficiency. This paper seeks to estimate the impacts of environmental factors on the profitability of rice farmers in the Red River Delta of Vietnam. The dataset was compiled from personal interviews in 349 farmers. Both OLS and MLE translog profit functions were used in this study. Five production inputs and four environmental factors were included in those functions. The estimation of the stochastic profit frontier with a two-stage approach was used to measure profitability. The results showed that the profit efficiency was about 75% on average and various environmental factors influence profit efficiency significantly as well as beside farm specific characteristics. Plant disease, soil fertility, irrigation, and water pollution were the four environmental factors that caused profit loss in rice production. The results of the study indicated that farmers should reduce household size and the quantity of farm plots, apply a row seeding technique and improve environmental factors to obtain high profit efficiency. Special consideration should be given to irrigation infrastructure and water quality improvement.

Economic Indicators of Primary Milk Producers’ Co-Operative Societies

This paper examines the physical and financial performance of some primary dairy co-operatives in West Bengal state in India. It suggests that financial performance indicators dominate over physical ones, and all the dominating variables have long term positive impact on Primary milk Producers’ Cooperative Societies (PMPCSs). The significant impact of financial performance variables contributes to high profit efficiency for all primary dairy cooperative societies under study. When the profit efficiency is measured only on the basis of financial performance indicators the score of efficiency for all the PMPCSs lies between 90% and 100% level suggesting that all PMPCSs perform well when the performance of PMPCSs is judged only on the basis of financial performance indicators. But when they are judged by the combined effect of both physical and financial performance indicators, all PMPCSs are not performing well because the impact of physical performance variables differs significantly among them. These results seem to suggest that in order to strengthen the dairy development programme on co-operative line at the primary level more emphasis should be given to these dominating physical and financial performance variables in general and physical dominating variables in particular.

Bank efficiency in South-Eastern Europe

This study examines the cost and profit efficiency of banking sectors in six transition countries of South-Eastern Europe over the period 1998–2008. Using a stochastic frontier approach, our analysis reveals that the average cost efficiency of South-Eastern European banks is 68.59 percent, and the average profit efficiency is 53.87 percent. Regressions on the determinants of bank efficiency show that foreign banks are characterized by higher profit efficiency but lower cost efficiency, and government-owned banks are associated with lower profit efficiency than domestic private banks. However, the efficiency gap between foreign-, domestic private- and government-owned banks narrows over time. We also find that the market power of a bank has a positive association with both cost and profit efficiency. Institutional development, proxied by progress in banking regulatory reforms, privatization and enterprise corporate governance restructuring, also has a positive impact on bank efficiency.

Bank Efficiency in Transition Economies: Recent Evidence from South-Eastern Europe

This study examines the cost and profit efficiency of banking sectors in six transition countries of South-Eastern Europe over the period 1998–2008. Using the stochastic frontier approach, our analysis reveals that the average cost efficiency of SEE banks is 68.59% and the average profit efficiency is 53.87%. The second-stage regressions on the determinants of bank efficiency further show that foreign banks are associated with higher profit efficiency but moderately lower cost efficiency. Government banks are associated with lower profit efficiency. The efficiency gap between foreign banks, domestic private banks and government banks, however, has narrowed over time. We also find that the degree of individual banks’ competitiveness has a positive association with both cost and profit efficiency. Finally, institutional development, proxied by progress in banking reforms, privatization and corporate governance restructuring, also has a positive impact on bank efficiency.

Measuring bank branch performance using Data Envelopment Analysis (DEA): The case of Turkish bank branches

The aim of this study is to develop a performance model for measuring the relative efficiency and potential improvement capabilities of bank branches by identifying their strengths and weaknesses. Another purpose is to investigate the production and profitability aspects of branches. Under both production and profitability approaches, efficiency characteristics of branches, which are grouped according to different sizes and regions, have similar tendencies. In both analyses, it is apparent that branch size and scale efficiency are related to each other. As branch size increases scale efficiency increases too and after the most productive scale size, however, as size increases efficiency decreases. Too small and too large branches need special attention. Putting production and profit efficiency scores on two scales reveals the performing characteristics of branches. Each region needs different handling. Branches with low production-low profit efficiency should be evolved towards high production-high profit efficiency region. Key words: Data envelopment analysis, bank branch performance, efficiency, technical efficiency, pure technical efficiency, scale efficiency.

Efficiency and productivity of Greek banks in the EMU era

We provide a characterization of the Greek banking system's efficiency and productivity under the new environment that the Economic and Monetary Union (EMU) participation implies. We consider cost and profit efficiency as well as productivity change of commercial banks using the nonparametric Data Envelopment Analysis (DEA) and the Total Factor Productivity (TFP) Malmquist Index. The period under study is 1998-2003 covering Greece's entry into the euro area in 2001 and the run-up to it. Moreover, enhanced competition along with lower inflation and interest rates has further motivated financial innovation and Off-Balance Sheet (OBS) business. Our findings suggest that cost efficiency has risen by 4.3% over the 6 years under study. Moreover, Greek banks seem to enjoy relatively high profit efficiency (on average 75%) showing an increase by 93% over 1998-2003. Similarly, productivity seems to have risen by 15% and this was mainly driven by the improvements in the performance of best-practice institutions. Our results do not show any role for OBS activities in Greek banks' efficiency. Finally, while the impact of profitability and size on efficiency and productivity yields mixed results, our empirical findings seem to corroborate previous studies in that controlling for risk preferences is important in determining bank efficiency.

Efficiency of European Insurance Companies: Do Local Factors Matter?

This paper tries to assess to what extent the still large differences in insurance markets across EU countries explain differences in individual firms’ x-efficiency. I estimate cost and profit frontiers, using balance sheet data on a sample of European insurance companies for the period 1997-2006. While country specific factors does not seem to affect the efficiency of life insurers, they do have a strong influence on non life companies. In particular, insurance penetration affect positively cost efficiency, whereas operating in market based less on compulsory motor insurance has a negative effect; efficiency gains are translated into higher profit efficiency. Moreover, in non life business, composite insurers tend to be less profit efficient than specialised entities. These results suggest caution in evaluating insurers’ performances abstracting from the local market structure.

Efficient or Fortunate? The Impact of Environmental Economic Conditions on Co-Operative Banks

This paper analyses the cost and profit efficiency of Italian co-operative banks. These small financial institutions have homogeneous business model and their performance is strongly influenced by the economic conditions of their local markets. As recognised by various recent studies (Bos et al., 2008), the efficiency measurement has to account for the heterogeneity of environmental conditions. By using a sample of 2683 year observations collected between 2000 and 2005, we estimated cost and profit efficiency using the Stochastic Frontier Analysis and including various environmental variables accounting for disparities among Italian regions. Our results provide evidence that banks in the North-East of Italy are more cost efficient, taking advantage of a favourable environment, while banks in the South of Italy display a higher profit efficiency, probably due to lower competitive pressures.

Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation

By employing a stochastic frontier approach, we examine the effect of bank size, corporate control, and governance, as well as ownership, on the cost (input) and alternative profit (input‐output) efficiencies of Turkish banks. We find that the average profit efficiency is 84% for Turkish banks. The oligopolistic nature of the Turkish banking industry has contributed to less than optimal competition in the loan market and deposit markets. Our results indicate that the degree of linkage between cost and profit efficiency is significantly low. This suggests that high profit efficiency does not require greater cost efficiency in Turkey, and that cost inefficient banks can continue to survive in this imperfect market, where profit opportunities are abundant for all types and sizes of banks. Accordingly, our results indicate that the different sizes of banks have capitalized these opportunities equivalently.