Scale Efficiency in the Banking Sector of Pakistan

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 to be the 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.