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Mian Sajid Nazir* and Atia Alam**
Privatization is considered one of the most sophisticated techniques to improve the financial position of the banking sector and has been empirically tested by many researchers through different methods; and still, many studies are under way to assess its implications on the economy. Prior research has shown a significant positive effect of privatization on the financial institutions’ profitability. The present study is conducted to evaluate the operating efficiency of 28 Pakistani commercial banks over a five-year period, i.e., 2003-2007, through the traditional method and Data Envelopment Analysis (DEA) approach. The results of the traditional approach suggest that privatization cannot help banks in improving their operating income. These results add further robustness to the findings of the DEA approach of measuring efficiency, which show that public banks are better able to cover their interest and non-interest expenses from their corresponding revenues.
The significance of the financial sector in the economic growth cannot be denied, and the banking sector, in its capacity of intermediation between the borrower and the lender, facilitates the economic activities as a part of the financial sector. Evaluating the financial conditions and the performance of banks has been an issue of considerable importance in recent years, particularly in the developing countries. This phenomenon is attributed to the crucial role of commercial banks in the economy, which is a result of the generally-accepted fact that commercial banks are the dominant financial institutions and represent the foremost source of financial intermediation in these countries. The scrutiny of the overall performance of the banking sector is important to depositors, owners, potential investors, and of course, to the policy makers, as banks are the effective executors of the monetary policy of the government. To establish a better internal control, and thereby increase the performance of the banks, various financial restructuring reforms have been developed. One of them is the privatization program—transferring the ownership from public hands to private ones. Such transformation of ownership is done to enhance competition and efficiency by permitting the market forces, rather than the administrative forces, to determine the prices. Privatization is used by the governments to strengthen the financial health and increase profitability, by liberalizing the interest rates, abolishing limits on credit and monetary policies, establishing well-defined prudential regulations and governing rules, developing an effective monitoring system for investments and utilization of funds in profitable opportunities (Khan, 2002).
* Lecturer, Department of Management Sciences, COMSATS Institute of Information Technology, Defence Road off Raiwind Road, Lahore, Pakistan; and is the corresponding author. E-mail: firstname.lastname@example.org
* * MS Scholar, Department of Management Sciences, COMSATS Institute of Information Technology, Defence Road off Raiwind Road, Lahore, Pakistan. E-mail: email@example.com The Impact .of Financial Reserved. © 2010 IUP All Rights Restructuring on the Performance of Pakistani Banks: A DEA Approach 71
profit after taxes 16.With a wave of socialist government policies. whereas the public sector banks had a market share of 20%. having political views of government intervention. etc. and would contribute some useful addition to the finance literature of Pakistan. The present study is conducted to observe the effects of restructuring reforms on the Pakistani commercial banks by using the traditional approach as well as X-efficiency measure of performance. No.1%. viz. many banks were privatized to achieve the desired goals.. and Return on Equity (ROE) 22. at the end of year 2007. there seems to be no great difference in ROA and ROE of the private and public sector banks. Muslim Commercial Bank Limited and Allied Bank Limited. the privatized banks had a market share of 74. According to the quarterly performance review of the State Bank of Pakistan (SBP).2%. ROA 2. Literature Review Banking efficiency is under the active consideration of many researchers to analyze the impact of deregulation of the financial restructuring reforms on banking performance. The traditional approach encompasses balance sheet information—profit after taxes. Return on Asset (ROA) 2. profit after taxes 5. however. Bonin et al. and the new rules and regulations by the SBP changing the competitive position of the local commercial banking industry.2%. the current study is expected to enhance the earlier findings on bank efficiency and financial restructuring. This inefficiency led to a large number of non-performing loans. Issues analyzed in the study are: (1) Is there a significant difference between the state-controlled banks and private banks? (2) Has privatization improved banks’ efficiency or not? In the light of Pakistan’s economy sustaining a remarkable growth in the first decade of the new millennium. 2006) and the state’s direct intervention in operations led to the reduction in economic growth. used privatization program to improve the financial performance and the overall economic efficiency. Vol.1%. administrative expenses.—whereas. with the removal of government economic policy in 1991. The objective of this study is to conduct a comparative analysis of the operating efficiency of state-controlled banks and private banks in Pakistan through the traditional and Data Envelopment Analysis (DEA) approach by using the sample data of 28 commercial banks for the period 2003-2007. . a remarkable change was achieved in the market share and operating profit after taxes from the financial restructuring reforms. 2010 . allocative. the privatization program was initiated by transferring the control of two nationalized banks to private hands.4%.4%. This change in the performance and efficiency of the banking sector is then explored and tested by many researchers. 1. 16. Thus. the entry of new domestic and international incumbents. non-utilization of loans in priority projects.and post-privatization effect on bank’s profit and cost efficiency across six transition economies by using Stochastic Frontier 72 The IUP Journal of Applied Finance.8% (SBP 2008). Economies. and inappropriate rates of interest on deposits and lending. operating expense. X-efficiency consists of parametric and nonparametric approaches used by researchers to calculate cost. (2004) compare the pre. and ROE 19. all financial institutions were nationalized in 1974 under the Pakistan Banking Council (Khalid. Thereafter. Later. technical and operational efficiency.
in contrast with public banks. however. technical. Khalid (2006) analyzed the effect of privatization on Pakistani commercial banks for the period 1990-2002. with the newly privatized-banks showing an increase in the profitability level. Chen (2001) measured X-inefficiency of 41 Taiwan banks for a year 1997. where several accounting measures utilized financial statement items such as ROI. however. allocative and overall efficiency of 40 Pakistani commercial banks by using the DEA approach during the period 1998-1999. through the DEA approach. Attaullah et al. scale and pure technical efficiency through the DEA approach and regression analysis of unbalanced panel data over the sample period of 1991-2000. (2004) measured the overall technical. Noulas (2001) measured the operating efficiency of Greek banks through the DEA approach for the period 1993-1998. as compared to the private and public banks. In this study. ROA. The results supported the ongoing process of privatization. The author found strong support for the privatization process and ended up with a need for improvement in banking efficiency. The findings of this study are mixed. (2005) conducted a study on 88 banks from 22 developing countries by using the univariate tests and the panel data estimates techniques and found a decrease in the economic efficiency and increase in credit risk exposure of private banks. pure technical and scale efficiency of Pakistan and India’s commercial banks before and after the privatization for the period 1988-1998 and found an improvement in the efficiency of Pakistani banks after the privatization. there is still a need for a better monitoring and controlling system for the banking industry. private banks were more efficient. ratio analysis showed a positive significant effect of privatization on banking efficiency. as compared to the pre-privatization period. By using the CAMELS framework of financial ratios. the timing of privatizations shows different effects on banking efficiency. and the study concluded that privatization brought little improvement in the whole banking system. The results support the finding that privatization has a significant effect on banking performance. and found strong support for the privatization program. Boubakri et al. and allocative. both private and public banks’ operating efficiency is calculated through the traditional approach and the DEA approach to analyze the performance of private banks in comparison with public banks. By using the DEA approach. Akhtar (2002) conducted a study to measure the technical. while according to DEA. as the early-privatized banks have proved to be more efficient than the later-privatized banks. The results. efficiency gaps between the two groups (public and private) are statistically insignificant. showed that foreign banks achieved the highest efficiency level. however. Theoretical Background Earlier. Burki and Niazi (2003) tested the privatization effect on Pakistan’s banking cost. the banks’ efficiency used to be calculated through the traditional approach.Approach (SFA). interest The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach 73 . The regression results showed a negative and statistically significant effect of independent regulator on the cost and allocative efficiency of banks.
among which. secondly. Qayyum and Khan.coverage ratio and administrative expenses to operating income (Noulas et al. which give rise to the need to employ other approaches or techniques to calculate efficiency. 2007.. it also enables a firm to forecast its future performance. 1. and Noulas et al. no one can predict the overall performance and the strength of a firm from a few ratios. financial risk. No.. 2004. it also carries some drawbacks.. To offset these deficiencies. 16. It provides an opportunity to evaluate the firm performance against the benchmark (Qayyum and Khan. First. and liquidity position. There are four types of frontier approaches. 2008). 2010 . SFA. this approach does not include the long-term effect in its calculations. 2008). the X-efficiency approach was introduced by the researchers to calculate the efficiency of firms on a frontier. Financial ratio approach has been used to analyze the present performance or position in the market and operating efficiency of firms from different perspectives. and Noulas et al. Sinkey. 2007. Ataullah et al.. 2002. chances of bankruptcy cost. 2007). as there are other factors which affect the financial strength and performance of a firm (Qayyum and Khan. 2001. 74 The IUP Journal of Applied Finance. Nevertheless. Vol. Farrell (1957) was the first to present a new technique of frontier approach for measuring inefficiency by defining “the deviation of actual from optimal behavior”.
Angelidis and Lyroudi. All the financial data were collected in terms of Pakistani rupees for the period 2003-2007. 2001 and 2002. Tannenwald. 2001. BCC allows the variability of The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach 75 . the banking efficiency is calculated through operating approach. (1984). or (2) it generates a given set of output from minimum inputs.. and Noulas et al. 2006. a majority of researchers prefer to use DEA while calculating efficiency because it can be applied even when the sample size is small (Banker et al. 11 banks were disqualified from the original sample. Research Methodology Efficiency of banks can be measured either by operating or intermediation approach. Banking literature suggests that operating efficiency is better analyzed by ratio of non-interest expenses to its profitability (Avkiran. Charnes and Cooper (BCC) model of Banker et al.of firms without using the DEA approach. However. While CCR assumes that DMU is operating at constant return to scale. and the remaining one is a public bank. in intermediation approach.. 1984. Sathye. (1978) and Banker. two different methodologies were used to compare the operating efficiency of Pakistani commercial banks. 2007. Ataullah et al. ratios having value 1 are considered as efficient and on the frontier. Non-interest expense is further categorized to determine a ratio of labor expense to net income. 1998. deposits.. The total listed commercial banks are 39. In this study. Following Noulas (2001). 2002. In all. The data source of this study is the annual financial statements of the commercial banks listed on Karachi Stock Exchange (KSE). 1995. out of which 29 are private banks. There are a number of DEA models. 1999). Moreover. Isik and Hassan. While most of these were excluded because of unavailability of relevant data. Bauer et al. others started their operations after 2003. the most frequently used are: Charnes. A bank is said to be relatively efficient as compared to other banks if (1) it produces the maximum output from a given set of inputs. Empirical Model The use of DEA model allows the management of firms and researchers to analyze and compare the performance of various banks across the selected sample as well as other traditional measures of efficiency used in literature. and investments (Akhter. For both of these versions. 2006. So. 2008). In operating approach. Noulous (2001) used interest revenue and non-interest revenue as two output variables and interest expense and non-interest expenses are treated as input variables. Qayyum and Khan. and efficiency is calculated in terms of cost/revenue perspective. Cooper and Rhoades (CCR) model of Charnes et al. the bank is considered as a manufacturing unit and efficiency is measured in terms of outputs such as loans. 9 are state-owned. The bank having maximum efficiency is considered as ‘the best-practicing firm’ and the remaining banks’ efficiency is compared with it. On the other hand. while proportions having relative amount less than 1 or 0 are deemed to be inefficient. Kasman and Yildirim. DEA is used for calculating relative efficiency. 2004.. decrease in the ratio makes a bank more economical in realizing its upcoming reduction in revenue (low interest rate and decrease in volume of loan) from its earnings. Moreover. Chen. the bank is considered as producer of services. 2002).
t. (1978) addressed this issue and proposed the following linear programming form of Equation (1) to calculate efficiency by using DEA: Max E j U Y V X i i 1 r 1 m s r rj . The mathematical expression of this relationship is as follows: Ej U Y V X i i 1 r 1 m s r rj . the assigned 76 The IUP Journal of Applied Finance. and i 1 i m Ur. No. different banks may value outputs and inputs in a different way and assign different weights. while the sum of weights of inputs and outputs of banks should be equal to 1. the relative efficiency of a bank is defined as the ratio of weighted sum of outputs to the weighted sum of inputs available to that bank.... As the present study is assuming constant returns to scale for the commercial banks under review. Vol. Vi 0 The first inequality assures that the efficiency ratio of bank j cannot exceed 1. Moreover. 1. Charnes et al. 2010 . However.(2) ij s. 16.(1) ij where.return to scale in the model. Ej 1.. Determining a common set of weights and their appropriate allocation could be difficult as inputs and outputs can be calculated and entered in Equation (1) without standardization. V 1. and Xij is the amount of i input used by bank j Equation (1) uses controllable inputs and constant returns to scale. r 1 s U r 1. Ej is the efficiency ratio of bank j s is the number of outputs of bank U r is the weight of output r Y rj is the amount of r output produced by bank j m is the number of inputs of a bank Vi is the weight of input i.
2552 0. by the operating profits.194. standard deviation and coefficient of variation have been calculated for both—state-controlled banks and private banks—in order to have a better comparative analysis.94 1.4242 0.21 2. thereby increasing their deposits as well as capacity to generate more revenues.09 3.680. labor costs and non-interest expense for private banks are more because of higher wage rates.32 7. Empirical Results Ratio Analysis Table 1 shows the descriptive statistics of all variables averaged for private and state-controlled banks for five years to analyze changes over the time period. At first. the state-controlled banks.69 1.908.947.89 1. However. One major reason for this difference is the larger network and a wide range of branches of state-controlled banks across the country. private banks show larger values of standard deviation and coefficients of variation as compared to public sector banks. State-controlled banks have larger mean values of interest revenue and interest expense as compared to private banks.012.906.705. Table 1: Descriptive Statistics Variable Operating Profit Interest Revenue Interest Expense Non-Interest Revenue Labor Expense Non-Interest Expense State-Controlled Banks Mean 3.4117 0. This incremental supply and demand of money in the state-controlled banks increase the profitability and non-interest revenue for the state-controlled banks. promotional and distributional expenses.713.106. however.weights should also be greater than 0 and each input and output used to calculate the relative operating efficiency of the bank must have some positive weight. The results reported in these tables strengthen the earlier findings of descriptive statistics presented in Table 1.613.4054 0.4641 (in mn) Tables 2 and 3 present the year-wise analysis of state-controlled and private banks on an individual basis.95 2.17 2. Secondly.68 CV 0.4435 0.19 3.845. have shown better operating performance than the private banks. as a larger part of government funds is deposited in these banks. In addition to this.399.674.95 CV 0.68 2.621.01 815. on average. To remove any doubt.8467 0.39 790. The higher values in interest revenue and interest expense by the private banks might be due to the bank’s own endogenous factors. there The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach 77 .6064 0.92 2.351. respectively.46 3. the results describe no particular sequence.348.6883 0.85 5.32 2.2871 Mean 2.96 2.96 SD 1. the allocative weights are determined by DEA so that each bank can maximize its own efficiency ratio.25 Private Banks SD 1. its exposure to different risks and the overall disturbed macro environment of economy. as any other set weights will reduce its operating efficiency.4568 0.65 8.753.529.5475 0. The efficiency ratios have been calculated by dividing the non-interest expenses and labor expenses.162.23 2.958.474.90 742. Mean.
2660 9.0871 0.4809 1.6878 2.6623 –12.7229 0.3343 –0.4295 1.7060 4.9363 0.8265 0.2846 0.3049 0.8560 0.3604 1. 1.9465 –2.5362 5.3811 –28.4351 1.7407 0.5043 2.1955 0.5433 – – 2.6600 0.1670 1.6012 26.5471 2005 0.8759 2.9744 –4.5144 0.5602 2.0878 –1.5511 7.0128 0.5471 – 1.0966 61.8002 0.6971 –12.3063 0.19211 –0.8200 6.6899 0.6160 – 1.5182 40.5901 1.8728 – 0.5383 2.0436 1.4279 0.5501 40.5145 1.7796 5.6201 1.6971 0.2279 –4.3176 0.2609 3.3546 0.0808 2.9744 1.2574 0.3658 2.3988 3.7202 0.0518 2.9999 – – 0.6491 – –2.0374 1.3966 – 0.2153 5.9044 0.3323 The IUP Journal of Applied Finance.0533 5.3323 –0.7157 0.8002 –2.3903 0.5916 – – 1.6180 4.4079 17.8275 1.4723 4.0953 1.4084 –28.6333 2.0397 0.3090 – 0. No.4478 0.7442 0.4296 1. 2010 .6149 – 1.5603 61.6712 1. Vol.5593 0.6444 0.7674 –2.1029 0.9723 1.4084 0.1354 0.5472 1.5135 0.2171 –0.7417 12.3090 2004 – 1.9072 14.2784 0.Table 2: Total Operating Efficiency (Non-Interest Expense/Operating Income) Bank Al Baraka Islamic Bank Alfalah Bank Bank Al-Habib Allied Bank Askari Bank Atlas Bank Crescent Commercial Bank Faysal Bank Habib Bank Habib Metropolitan Bank Khyber Bank Meezan Bank MCB Bank My Bank National Bank NIB Bank The Bank of Punjab Punjab Provincial Bank Royal Bank of Scotland Saudi Pak Commercial Bank SME Bank Soneri Bank Standard Chartered Bank United Bank Zarai Tarqiati Bank Mean Maximum Value Minimum Value 78 2003 – 0.6947 0.5727 0.0664 1.7558 – 0.08011 26.6052 0.49076 0.3955 12.6878 2007 1.6400 0.6719 1.3946 3.4478 0.5128 –3.9189 0. 16.9815 0.6333 2006 1.
2654 8.1237 1.0373 1.5405 1.5409 – – 1.0401 26.4823 0.7384 12.3610 12.8239 1.2840 0.0378 1.2895 0.3906 0.3525 0.4328 1.9476 0.6549 1.6191 1.5140 1.9430 0.4516 0.9531 1.2464 0.Table 3: Total Administrative Efficiency (Labor Expenses/Operating Income) Bank Al Baraka Islamic Bank Alfalah Bank Bank Al-Habib Allied Bank Askari Bank Atlas Bank Crescent Commercial Bank Faysal Bank Habib Bank Habib Metropolitan Bank Khyber Bank Meezan Bank MCB Bank My Bank National Bank NIB Bank The Bank of Punjab Punjab Provincial Bank Royal Bank of Scotland Saudi Pak Commercial Bank SME Bank Soneri Bank Standard Chartered Bank United Bank Zarai Tarqiati Bank Mean Maximum Value Minimum Value 2003 – 0.7943 0.4223 3.2110 –0.4028 17.8661 2.9066 13.7564 –2.6497 1.4645 4.3115 0.2227 79 The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach .5133 0.7191 0.4614 0.6491 – –2.0651 1.5917 2006 1.5184 0.3755 0.5658 0.5063 –3.2238 –4.7433 1.9015 0.7442 0.5051 0.2082 0.7250 –2.3674 3.3834 0.0110 2.3886 0.0826 –1.0157 0.9044 0.1884 –0.8548 0.9976 – – 0.6035 – 1.7421 –0.4777 1.5917 2.8233 61.7853 4.2168 1.5732 1.3525 –28.7116 0.9722 2.8026 4.7019 4.7607 5.5910 – – 1.1804 0.3504 0.9722 2007 1.1804 0.3826 3.2101 0.6429 –12.5075 – 1.0000 2004 – 1.8666 – 0.5319 2.2678 2.9448 –2.4391 40.4962 2.3708 2.4227 0.5361 5.2227 –0.3236 –28.2464 –12.2357 3.5110 40.1347 0.4292 1.5875 26.0000 – 0.0472 0.5322 4.6050 0.6483 0.7552 – 0.7250 0.8901 0.7101 0.0493 0.0881 1.3599 1.6358 0.6137 – 1.3041 – 0.9220 61.7433 –4.6659 0.6826 0.5075 2005 0.0414 5.0334 2.
No.487* 0.exist large variations in the efficiency of different banks within the same groups over the window period and this might be due to the banks’ own intrinsic factors.033 2. etc.1356 K-W Chi-Square 1. These results add robustness to our earlier findings that with the passage of time.e. The difference between the efficiency of the state-controlled and private banks was tested empirically through Kruskal-Wallis chi-square and the results are reported in Table 4. Finally. Vol.476 4.4146 3.6957 1. operating efficiency of the state-owned banks increases due to the reduction in labor and administrative efficiency.2401 2. One of the possible reasons for these mixed findings of the efficiency for the state-controlled and the private banks may be the regulatory requirements of the central bank. SBP pressurized the commercial banks to increase the number of branches up to the minimum required level.6707 0. Likewise.4610 (1.059 Note: * and ** indicate the significance levels at 5% and 10% respectively.2661 2. leading to reduced efficiency and increased costs. 2004. Table 5 reports the findings of chi-square of labor efficiency between the state-controlled banks and private banks. Table 4: Differences Between the Total Operating Efficiency of Banks Year 2003 2004 2005 2006 2007 Mean State-Controlled Banks 2.508 0.2%) in 2003 and 2007 respectively.7% registered in the year 2003 and the minimum is 41. 1.6391 3. goodwill. The difference between labor efficiency of the state-controlled banks and private banks is statistically insignificant at 80 The IUP Journal of Applied Finance. Our findings support the null hypothesis that there is no statistically significant difference between efficiency of the state-controlled banks and the private banks in 2003.. It is evident from the results that state-controlled banks have the maximum efficiency of 269% in the year 2007 and minimum efficiency of –96.6874 2.4% in 2007.9% in the year 2005. service provisions. the difference between the means of state-controlled banks and private banks is tested and found insignificant at the 5% level. These regulations force private banks to increase their number of branches which require heavy capital expenditure.2989) (0. operating efficiency of private banks decreases. 2010 . i. The results are almost similar and the state-controlled banks show the highest (265%) and the lowest (–111%) administrative efficiency level in 2007 and 2004 respectively. On the other hand. 2005 and 2006. 16. while in 2006 and 2007. Whereas in 2007.381 1. private banks register the maximum (403%) and minimum (41. and this might be due to a larger decrease in the operating efficiency of private banks as compared to other years.9693) 2. while the maximum efficiency of private bank is 668. bid/ask spreads. demonstrating that private banks’ efficiency declines with year. the difference between operating efficiency of the state-controlled banks and the private banks is significant at 5% level.0257 Private Banks 6.
6420 0. private banks in Panel B depict larger variation not only across the years but also within the banks. show that there is no statistically significant difference between operating efficiency of public and private banks. On an average.004 2. In comparison with them.0333 1. 2004 and 2005. the differences between the efficiency of state-controlled and private banks. deviation of the state-controlled bank from the best practice firm (National Bank) is not so large. In the end. whereas the state-controlled banks proved to be more efficient and their efficiency level remained the same or better throughout the study period. efficiency of private banks declined across the years.03% respectively.62% and 67. on average. DEA Approach Panel A of Table 6 measures the banks’ efficiency using the X-efficiency approach of DEA. by using the DEA approach.4328 K-W Chi-Square 0.080 1.8690 3. having. Finally. Royal Bank of Scotland emerges as the least efficient unit within all private banks. the Bank of Punjab is the second most and Askari bank is the least efficient bank during the whole window period. The findings of this study are consistent with Burki and Niazi (2003).6761 Private Banks 4.4127 2. On average. In contrast with the Habib Bank.Table 5: Differences Between Administrative Efficiency of Banks Year 2003 2004 2005 2006 2007 Mean State-Controlled Banks 0.508 0. On the whole. however.9172 2. which is quite opposite to our expectations. Contrary to this. as measured by DEA. an efficiency level of 100% (97%). the efficiency of state-owned banks and private banks across all years is 83.8787 –1. have been tested for statistical significance using Kruskal-Wallis chi-square.872** 4. The results reported in Table 7 indicate that state-controlled banks seem to be more efficient with the passage of time. 5% level in 2003. who found an overall insignificant effect of privatization on banking performance.487* 0. These results are further strengthened when the relative difference between the operating efficiency of the state-controlled banks and private banks is found to The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach 81 .9613 1. whereas Noulas results. they are significant at 5% level in 2007 and 10% level in 2006. Habib Bank (MCB Bank) seems to be the first most (second most) efficient DMU.6579 0. National Bank and Punjab Provincial Bank proved to be the most efficient banks during the study period.2073 2.1120 –0.092 Note: * and ** indicate significance levels at 5% and 10% respectively. while private banks’ operating efficiency declines over the years on the frontier. the mean difference between the two groups is statistically insignificant at 5% level.
0000 1.9006 1.0000 – 0.8559 0.8106 0.6616 The IUP Journal of Applied Finance.4354 0.9961 0.5792 0.9763 0. Vol. 1.6239 0.8155 1.4323 0.0000 0.7051 0. 2010 .6735 0.0000 0. 16.8909 0.0000 – 1.7208 1.7156 0.0000 0.7657 1.5404 0.4725 0.5016 0.6178 0.0000 0.0000 0.6054 1.6176 1.9598 0.7408 0.0000 0.8897 0.7900 0.6980 – 1.7626 1.7856 0.0000 1.9776 0.8242 0.8052 1.0000 0.8331 0.8363 2005 0.6804 0.000 – 1.8003 – 0.9763 1.7362 0.9033 0.8790 0.8386 0.6450 0.8483 0.7350 0.7814 0.9330 1.0000 0.0000 0.8292 0.5434 0.6696 0.5208 0.5333 – 1.7364 0.9218 2006 0.6640 0.0000 1.9216 1.9616 0.0000 1.7491 1.5597 0.9301 2007 0.Table 6: DEA Results for Banks’ Operating Efficiency Panel A: DEA Results of State-Controlled Banks Banks Askari Bank Khyber Bank National Bank The Bank of Punjab Punjab Provincial Bank SME Bank Zarai Tarqiati Bank Mean 2003 1.6518 0.8430 0.000 0.0000 0.9453 0.7064 0.7298 0.8916 0.9323 – 0.7888 0.0000 0.9250 Panel B: DEA Results for Private Banks Al Baraka Islamic Bank Alfalah Bank Bank Al-Habib Allied Bank Atlas Bank Crescent Commercial Bank Faysal Bank Habib Bank Habib Metropolitan Bank Meezan Bank MCB Bank My Bank NIB Bank Royal Bank of Scotland Saudi Pak Commercial Bank Soneri Bank Standard Chartered Bank United Bank Mean 82 – 1.0000 0.7175 1.4815 – 0.8058 0.0000 1.4646 0.0000 1.4958 0.9608 – 0.0000 1.0000 1.4370 – – 0.000 0.0000 1.0000 0.0000 0.0000 0.0000 0.6401 0.9307 1.8869 0.5682 2004 1.6946 – 1.0000 0.6376 1.6815 – 1.0000 1.6290 0.5693 0.0000 – – 0. No.0000 0.
which increased administrative and non-interest expense.353* 4. This might be due to the increased competition among banks.915* 2.8363 0.4815 0. the overall economic and political conditions in Pakistan became worse.810 3.6376 0. According to the DEA approach. administrative expenses.9250 0. casting an adverse effect on the economic growth.9218 0. state-controlled banks have a large amount The Impact of Financial Restructuring on the Performance of Pakistani Banks: A DEA Approach 83 . the average difference between the state-controlled banks and private banks is also significant at 5% level. Secondly. The empirical literature provides strong evidence regarding the significant impact of financial restructuring on banking performance. First of all.8052 0. 2006 and 2007.7657 0. as many new banks entered in early 2003.5682 0. and direct and indirect income are considered while calculating the operating efficiency of the commercial banks operating in Pakistan. Several reasons contribute to these unexpected results. SBP issued prudential regulations and banks are ordered to follow them strictly. loans provided under consumer financing to general public became bad debts due to the inability of consumers to repay the loans.244* 7. from 2006. increase in paid-up capital requirement. The purpose of this study is to conduct a comparative analysis of public and private commercial banks of Pakistan for the period 2003-2007 through the traditional method and the DEA approach.362* Note: * Indicates significance at 5% level. Conclusion Privatization is considered one of the most widely used techniques to improve the overall economic growth. Especially in the banking sector.Table 7: Comparison of State-Controlled Banks and Private Banks Year 2003 2004 2005 2006 2007 Mean State-Controlled Banks 0.531 6. Thirdly.8362 Private Banks 0.9301 0. In the same way.6703 K-W Chi-Square 1.6616 0. Finally. financial reforms enhance competition and improve the quality of products and services. be significant at 5% level in 2004. reserve requirement. Our results are consistent with those of Noulas (2001) and Burki and Niazi (2003). Large variations are found across the sample. and number of branches requirement further led to the decline in the efficiency of private banks. On the other hand. The study results show that the efficiency of private banks is less than that of public banks and differences between the operating efficiency of both state-controlled banks and private banks are statistically insignificant. Earnings before interest and taxes. No particular trend has been seen in the findings of the traditional method. operating efficiency of private banks declined during the study period. not only among different banks but also within banks.
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