PREDICTING THE EFFICIENCY OF COMMERCIAL BANKS IN BANGLADESH
Keywords:
DEA, Efficiency, Technical Efficiency, Productivity Growth, Domestic & Foreign Commercial Banks.
Abstract
This paper examines the efficiency of the thirty-six commercial banks (27 Domestic and 9 Foreign Banks) by reviewing Literature and analyzing 6 years (2011-2016) data. The sample was selected based on the availability of data. It is assumed that the banking sector complies with the variable returns to scale (VRS) approach which means the output of a bank is not proportionately related to its inputs. Therefore, VRS in the ‘Data Envelop Analysis (DEA)’ technique has been employed in this paper. The findings reveal that most (30 banks out of 36 banks) of the banks of Bangladesh are inefficient in terms of technical, allocative, and scale efficiency during the 2011-2016 periods. Conversely, only six banks (4 domestic banks and 2 foreign banks) were found efficient in overall scores in this scrutinization. This study did not find any single bank as efficient in all categories (allocative efficiency, technical efficiency, pure efficiency ratio) for the whole study period (2011-2016). This paper provides valuable intuition, analysis, and comments to the managers and policymakers of the bank’s efficiency score so that they comprehend their position. Finally, this paper suggests necessary steps to transform the inefficient banks into efficient banks, and to make stable the banking sector of Bangladesh.
JEL Classification Codes: E51, G21, M1.
References
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Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International financial Markets, Institutions and Money, 18(2), 121-136.
Azad, M. A. K., Munisamy, S., Masum, A. K. M., Saona, P., & Wanke, P. (2017). Bank efficiency in Malaysia: a use of malmquist meta-frontier analysis. Eurasian Business Review, 7(2), 287-311.
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Banna, H., Ahmad, R., & Koh, E. H. (2017). Determinants of commercial banks' efficiency in Bangladesh: does crisis matter? The Journal of Asian Finance, Economics, and Business, 4(3), 19-26.
Baten, M. A., & Mat Kasim, M. (2015). Efficiency and productivity change of selected online banks in Bangladesh: A non-parametric Malmquist approach. Journal of Internet Banking and Commerce, 20(3), 1-6.
Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European journal of operational research, 98(2), 175-212.
Bhattarai, B. (2018). Assessing Banks Internal and Macroeconomic Factors as Determinants of Non- Performing Loans: Evidence from Nepalese Commercial Banks. International Journal of Accounting & Finance Review, 3(1), 13-32. https://doi.org/10.46281/ijafr.v3i1.28
Bonin, J. P., Hasan, I., & Wachtel, P. (2005). Bank performance, efficiency and ownership in transition countries. Journal of banking & finance, 29(1), 31-53.
Girardone, C., Molyneux, P., & Gardener, E. P. (2004). Analysing the determinants of bank efficiency: the case of Italian banks. Applied Economics, 36(3), 215-227.
Haddad, A., Ammari, A. E., & Bouri, A. (2019). Impact of the Ownership Structure on the Financial Performance of Banks: Comparative Study between Conventional and Islamic Banks. International Journal of Accounting & Finance Review, 4(2), 50-63. https://doi.org/10.46281/ijafr.v4i2.442
Hossain, B. (2019). Deadweight Loss in the Interest-based and the Interest-Free (Islamic) Microfinance Programs: A Comparative Analysis. Uluslararası İslam Ekonomisi ve Finansı Araştırmaları Dergisi, 5(2), 49-71.
Hossain, B., & Wadood, S. N. (2020). Potential Unexplored? Tourism and Economic Growth of Bangladesh. Journal of Tourismology, 6(1), 63-77.
International Monetary Fund. (2021). World Economic Outlook Database. Retrieved from https://www.imf.org/en
Kalsie, A., Dhamija, J., & Arora, A. (2020). The Measure of Financial Stability and its Impact on Foreign Direct Investment: Evidence from BRIC Nations. International Journal of Accounting & Finance Review, 5(2), 80-93. https://doi.org/10.46281/ijafr.v5i2.797
Mahmood, M. (2019). The current state of the banking industry in Bangladesh. Retrieved from https://thefinancialexpress.com.bd/views/views/the-current-state-of-the-banking-industry-in-bangladesh-1556380055#:~:text=Bangladesh%27s%20banking%20system%20is%20now%20faced%20with%20a,anything%20but%20getting%20any%20better%20largely%20due%20
Masood, O., & Ashraf, M. (2012). Bank‐specific and macroeconomic profitability determinants of Islamic banks. Qualitative Research in Financial Markets.
Mirzaei, A., Moore, T., & Liu, G. (2013). Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies. Journal of Banking & Finance, 37(8), 2920-2937.
MRA. (2020). List of Licensed MFIs Retrieved from http://mra.gov.bd/index.php?option=com_content&view=article&id=115&Itemid=95
Muhammad Masum, A. K., Azad, M. A. K., Hoque, K. E., & Beh, L.-S. (2015). Domestic banks in Bangladesh could ensure efficiency by improving human resource management practices. PloS one, 10(7), e0121017.
Rashedul, H. M., & Israt, R. M. (2012). Data envelopment analysis of banking sector in Bangladesh. Russian Journal of Agricultural and Socio-Economic Sciences, 5(5).
Samad, A. (1999). Comparative efficiency of the Islamic bank vis-à-vis conventional banks in Malaysia. IIUM Journal of Economics and Management, 7(1), 1-27.
Samad, A. (2019). Determinants of Efficiency of the Islamic Banks of Bangladesh during 2008-2012. Journal of Islamic Banking and Finance, 7(1), 1-13.
Sarker, H. (March 16, 2020), Job creation scenario in the banking sector. Retrieved from https://thefinancialexpress.com.bd/views/job-creation-scenario-in-the-banking-sector-1584373890
Solaiman, G., Kadar, A., Wanke, P., & Azad, A. K. (2017). Bank efficiency in Saudi Arabia: examining the impact of the global financial crisis. Central Europian Review of Economics and Management, 1(4), 69-86.
Sufian, F., & Kamarudin, F. (2014). Efficiency and returns to scale in the Bangladesh banking sector: Empirical evidence from the slack-based DEA method. Asia-Pacific Journal of Business, 5(1), 1-11.
Sufian, F., Kamarudin, F., & Noor, N. H. H. M. (2013). Assessing the Revenue Efficiency of Domestic and Foreign Islamic Banks: Empirical Evidence from Malaysia. Jurnal Pengurusan, 37.
Suzuki, Y., & Adhikary, B. K. (2010). A ‘bank rent’ approach to understanding the development of the banking system in Bangladesh. Contemporary South Asia, 18(2), 155-173.
The Financial Express. (May 24, 2021), Bangladesh surpasses India on per capita income. Retrieved from https://thefinancialexpress.com.bd/economy/bangladesh-surpasses-india-on-per-capita-income 1621610135#:~:text=Bangladesh%27s%20per%20capita%20income%20is,per%20capita%20income%20was%20%242%2C064.
Tanwar, J., Seth, H., Vaish, A. K., & Rao, N. V. M. (2020). Revisiting the Efficiency of Indian Banking Sector: An Analysis of Comparative Models Through Data Envelopment Analysis. Indian Journal of Finance and Banking, 4(1), 92-108. https://doi.org/10.46281/ijfb.v4i1.585
Uddin, S. S., & Suzuki, Y. (2014). The impact of competition on bank performance in Bangladesh: an empirical study. International Journal of Financial Services Management 2, 7(1), 73-94.
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International financial Markets, Institutions and Money, 18(2), 121-136.
Azad, M. A. K., Munisamy, S., Masum, A. K. M., Saona, P., & Wanke, P. (2017). Bank efficiency in Malaysia: a use of malmquist meta-frontier analysis. Eurasian Business Review, 7(2), 287-311.
Bangladesh Bank, B. (2021). Banks and FIs. Retrieved from https://www.bb.org.bd/en/index.php/financialactivity/bankfi
Bangladesh Bank (2020), Developments of Islamic Banking in Bangladesh, October-December 2020. Retrieved from https://www.bb.org.bd/pub/quaterly/islamic_banking/oct-dec2020.pdf
Banna, H., Ahmad, R., & Koh, E. H. (2017). Determinants of commercial banks' efficiency in Bangladesh: does crisis matter? The Journal of Asian Finance, Economics, and Business, 4(3), 19-26.
Baten, M. A., & Mat Kasim, M. (2015). Efficiency and productivity change of selected online banks in Bangladesh: A non-parametric Malmquist approach. Journal of Internet Banking and Commerce, 20(3), 1-6.
Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European journal of operational research, 98(2), 175-212.
Bhattarai, B. (2018). Assessing Banks Internal and Macroeconomic Factors as Determinants of Non- Performing Loans: Evidence from Nepalese Commercial Banks. International Journal of Accounting & Finance Review, 3(1), 13-32. https://doi.org/10.46281/ijafr.v3i1.28
Bonin, J. P., Hasan, I., & Wachtel, P. (2005). Bank performance, efficiency and ownership in transition countries. Journal of banking & finance, 29(1), 31-53.
Girardone, C., Molyneux, P., & Gardener, E. P. (2004). Analysing the determinants of bank efficiency: the case of Italian banks. Applied Economics, 36(3), 215-227.
Haddad, A., Ammari, A. E., & Bouri, A. (2019). Impact of the Ownership Structure on the Financial Performance of Banks: Comparative Study between Conventional and Islamic Banks. International Journal of Accounting & Finance Review, 4(2), 50-63. https://doi.org/10.46281/ijafr.v4i2.442
Hossain, B. (2019). Deadweight Loss in the Interest-based and the Interest-Free (Islamic) Microfinance Programs: A Comparative Analysis. Uluslararası İslam Ekonomisi ve Finansı Araştırmaları Dergisi, 5(2), 49-71.
Hossain, B., & Wadood, S. N. (2020). Potential Unexplored? Tourism and Economic Growth of Bangladesh. Journal of Tourismology, 6(1), 63-77.
International Monetary Fund. (2021). World Economic Outlook Database. Retrieved from https://www.imf.org/en
Kalsie, A., Dhamija, J., & Arora, A. (2020). The Measure of Financial Stability and its Impact on Foreign Direct Investment: Evidence from BRIC Nations. International Journal of Accounting & Finance Review, 5(2), 80-93. https://doi.org/10.46281/ijafr.v5i2.797
Mahmood, M. (2019). The current state of the banking industry in Bangladesh. Retrieved from https://thefinancialexpress.com.bd/views/views/the-current-state-of-the-banking-industry-in-bangladesh-1556380055#:~:text=Bangladesh%27s%20banking%20system%20is%20now%20faced%20with%20a,anything%20but%20getting%20any%20better%20largely%20due%20
Masood, O., & Ashraf, M. (2012). Bank‐specific and macroeconomic profitability determinants of Islamic banks. Qualitative Research in Financial Markets.
Mirzaei, A., Moore, T., & Liu, G. (2013). Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies. Journal of Banking & Finance, 37(8), 2920-2937.
MRA. (2020). List of Licensed MFIs Retrieved from http://mra.gov.bd/index.php?option=com_content&view=article&id=115&Itemid=95
Muhammad Masum, A. K., Azad, M. A. K., Hoque, K. E., & Beh, L.-S. (2015). Domestic banks in Bangladesh could ensure efficiency by improving human resource management practices. PloS one, 10(7), e0121017.
Rashedul, H. M., & Israt, R. M. (2012). Data envelopment analysis of banking sector in Bangladesh. Russian Journal of Agricultural and Socio-Economic Sciences, 5(5).
Samad, A. (1999). Comparative efficiency of the Islamic bank vis-à-vis conventional banks in Malaysia. IIUM Journal of Economics and Management, 7(1), 1-27.
Samad, A. (2019). Determinants of Efficiency of the Islamic Banks of Bangladesh during 2008-2012. Journal of Islamic Banking and Finance, 7(1), 1-13.
Sarker, H. (March 16, 2020), Job creation scenario in the banking sector. Retrieved from https://thefinancialexpress.com.bd/views/job-creation-scenario-in-the-banking-sector-1584373890
Solaiman, G., Kadar, A., Wanke, P., & Azad, A. K. (2017). Bank efficiency in Saudi Arabia: examining the impact of the global financial crisis. Central Europian Review of Economics and Management, 1(4), 69-86.
Sufian, F., & Kamarudin, F. (2014). Efficiency and returns to scale in the Bangladesh banking sector: Empirical evidence from the slack-based DEA method. Asia-Pacific Journal of Business, 5(1), 1-11.
Sufian, F., Kamarudin, F., & Noor, N. H. H. M. (2013). Assessing the Revenue Efficiency of Domestic and Foreign Islamic Banks: Empirical Evidence from Malaysia. Jurnal Pengurusan, 37.
Suzuki, Y., & Adhikary, B. K. (2010). A ‘bank rent’ approach to understanding the development of the banking system in Bangladesh. Contemporary South Asia, 18(2), 155-173.
The Financial Express. (May 24, 2021), Bangladesh surpasses India on per capita income. Retrieved from https://thefinancialexpress.com.bd/economy/bangladesh-surpasses-india-on-per-capita-income 1621610135#:~:text=Bangladesh%27s%20per%20capita%20income%20is,per%20capita%20income%20was%20%242%2C064.
Tanwar, J., Seth, H., Vaish, A. K., & Rao, N. V. M. (2020). Revisiting the Efficiency of Indian Banking Sector: An Analysis of Comparative Models Through Data Envelopment Analysis. Indian Journal of Finance and Banking, 4(1), 92-108. https://doi.org/10.46281/ijfb.v4i1.585
Uddin, S. S., & Suzuki, Y. (2014). The impact of competition on bank performance in Bangladesh: an empirical study. International Journal of Financial Services Management 2, 7(1), 73-94.
Published
2021-06-07
How to Cite
Solaiman, M. G., Chowdhury, M. S. A., Hossain, B., Akter, S., & Azam, M. K. G. (2021). PREDICTING THE EFFICIENCY OF COMMERCIAL BANKS IN BANGLADESH. International Journal of Accounting & Finance Review, 7(1), 17-30. https://doi.org/10.46281/ijafr.v7i1.1168
Section
Regular Research Article/ Short Communication Article
Copyright (c) 2021 Md. Golam Solaiman, Md. Shahnur Azad Chowdhury, Basharat Hossain, Sultana Akter, Md. Kazi Golam Azam
This work is licensed under a Creative Commons Attribution 4.0 International License.
