Post-liberalisation efficiency and productivity of the banking sector in Pakistan

Abstract

The paper analyses post-reform banking efficiency and productivity of the banking sector in Pakistan. The sample consists of 37 scheduled commercial banks-18 domestic and 19 foreign-operating in Pakistan. The paper utilises non-parametric data envelopment analysis (DAE) and Malmquist productivity indices techniques. The paper also breaks down efficiency into 'pure' and 'scale' component, and productivity into 'technological' and 'efficiency' change indices. The paper comes up with the finding that both efficiency and productivity have declined in the post-reforms period of 1993-98. The component of 'pure' inefficiency was relatively higher in these six years and the decline was due to the large inefficiencies of foreign banks. Regarding productivity the decline observed who mainly due to technological regress and to some extent due to efficiency regress. At the institutional level it was discovered that foreign banks were relatively less efficient than domestic banks and most of the inefficiencies in the system was due to the poor performance of foreign banks, especially in the latter years. Within domestic banks, the performance of nationalised banks and privatised banks has improved. The study concludes that the reforms were successful to the extent that they helped in improving the working of domestic banks, due to increased competition.