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Efficiency and
productivity
195
Received 12 October 2011
Revised 3 February 2012
Accepted 17 April 2012
Abstract
Purpose The purpose of this paper is to discuss a comprehensive literature survey of studies
focusing on the efficiency and productivity of the banking sector using parametric and non-parametric
frontier techniques.
Design/methodology/approach Critically reviewing 106 studies published across the world
from 1994 to 2011, a conceptual framework is developed for the studies assessing the efficiency and
productivity of the banking industry using non-parametric DEA frontier approach.
Findings Both the frontier approaches, parametric and non-parametric, are gaining an edge over
the traditional financial performance measures. In the non-parametric approach, data envelopment
analysis (DEA) is widely applied to measure a banks efficiency and productivity. Studies conducted in
developed countries such as the USA, the UK and Europe are now emerging with the new concepts of
banking efficiency.
Research limitations/implications These findings are based only on the critical review of
106 studies. This study suggests the direction for future research and identifies the gap in existing
literature with the development of a conceptual model.
Originality/value This study is original in nature and included literature published in recent
issues of 2011.
Keywords Banking, Productivity, Efficiency, Parametric and non-parametric frontier approach,
Data envelopment analysis, Productivity rate
Paper type Literature review
1. Introduction
Banking institutions of any nation play a significant role in structuring economic
development and economic growth via the efficient intermediation of funds from
borrowers to savers. A strong banking sector effectively channels funds and financial
products in such a way as to strengthen the financial and economic system of any nation.
Therefore, the sound performance of the banking sector has always been a key issue for
researchers and policy makers charged with ensuring a strong and economically
developed nation. Traditionally, the performance and efficacy of banking institutions is
measured by financial ratios, but this approach has a major demerit in terms of its
subjectivity and reliance on benchmarking ratios (Yeh, 1996). Sherman and Gold (1985)
The authors express thanks for the suggestions made by two anonymous reviewers and the
Editor, Dr Bruce Burton, which have helped improve the paper. Dipasha Sharma gratefully
acknowledges the financial support provided by University Grant Commission New Delhi, India,
for her research in the form of a junior research fellowship.
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initiated the frontier analysis approach to bank performance assessment. They argued
for the application of frontier analysis techniques in bank performance evaluation
instead of financial ratios and other traditional financial measures. The frontier analysis
technique handles multiple inputs-outputs and captures long-term performance, while
helping to separate poor performers from the best institutions. It is a sophisticated
method of benchmarking institutions on the basis of their respective efficiency, while
identifying the best practice frontier (Berger and Humphrey, 1997). This concept of
frontier technique for the estimation of efficiency of production units was outlined by
Farrell (1957), on the basis of the primary model developed by Koopmans (1951) and
Debreu (1951). Afterwards parametric and non parametric frontier analysis techniques
have been widely applied in banking efficiency and productivity.
This paper provides a comprehensive review of studies that apply frontier techniques
to the analysis of banking efficiency and productivity, covering investigations from
1994 to 2011. The structure of this paper is as follows: Section 2 describes the conceptual
framework; Section 3 outlines the survey on the basis of conceptual model before
critiquing methodological issues and the selection of approaches, variables and
techniques. Section 4 suggests future research in the area and discusses emerging
operational research techniques in banking and finance. Section 5 concludes the survey.
2. Framework for efficiency and productivity
In our study we have reviewed 106 studies, published in various international journals,
conferences, books, thesis and working papers. A comprehensive snapshot of
106 reviewed studies is given in Table AI at the end of the paper and all other analysis,
tables and figures are structured on the basis of Table AI. The distribution of existing
studies from various sources is given in Table I. As shown in Table I, the most frequent
sources of publications are the Journal of Banking and Finance (24); followed by
European Journal of Operational Research (11), Omega (4), The Journal of the Operational
Research Society (4) and so on (figures given in parenthesis present the number of
publications in respective journals). The reviewed studies also include international
conference papers available on internet web sites, while the others present the thesis,
working papers and books on banking efficiency and productivity.
In our survey we have included studies from the year 1994 to 2011. Year wise
classification of reviewing studies is given in Table II.
Figure 1 shows the diagrammatic view of year wise publication of existing literature
from the year 1994 to 2011. Number of publications is increasing each year and it is clear
from the given figure that the frontier practices in banking performance and efficiency
evaluation is gaining popularity year by year. We have reviewed maximum number of
studies from recent publications in our study; 2010 (16), followed by the year 2009 (13)
(figures given in parenthesis present no. of publications in a particular year).
We further classified our survey of literature on the basis of studies conducted on a
particular country. Table III provides a snapshot of country wise studies in our reviewed
literature. Studies were conducted in different countries as well as cross-country analysis
was done by the researchers. Researchers conducted good number of studies in
European countries; comparison of efficiency across the European Union (Pastor et al.,
1997), productivity growth among the European countries (Casu and Molyneux, 2003).
The UK is among the top choice for European country analysis. Figure 2 shows the
country wise publications of literature. A good number of studies were conducted in the
Particulars
Journals
Journal of Banking and Finance
European Journal of Operational Research
Omega
Managerial Finance
The Journal of the Operational Research Society
SSRN
Socio Economic Planning Sciences
Interfaces
Economic Modeling
Applied Financial Economics
Management Accounting Research
Journal of High Technology Management Research
Unitar e-Journal
ICRA BULLETIN
Review of Financial Economies
International Journal of Operations Research
Eurasian Journal of Business and Economics
International Journal of Business Performance Management
International Review of Economics and Finance
Journal of Asian Economics
The Pakistan Development Review
Applied Economics
International Journal of Operational Research
Research in International Business and Finance
Journal of Asian Economies
MPRA
Journal of Business, Finance and Accounting
Journal of Multinational Financial Management
Investment Management and Financial Innovations
China Economic Review
International Journal of Productivity and Performance Management
Public Choice
International Journal of Production Economies
Applied Mathematics and Computation
International Journal of Bank Marketing
Expert System with Application
Journal of Business Research
Computers and Operational Research
International Journal of Business Management
International conference papers
Working papers and othera
Total
No. of papers
24
11
04
04
04
04
03
02
02
02
02
02
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
02
13
106
Note: aOther includes thesis, books and surveys available on internet web sites
Source: Authors on calculations based on Table AI in the Appendix
banking industry of developed nations like the USA, the UK, Europe. Developing nations
are also gaining attention of researchers as within India only, 24 studies were conducted
by the eminent researchers during pre and post liberalization periods of Indian banking
sector (Bhattacharyya et al., 1997; Saha and Ravisankar, 2000; Sathye, 2003). It clearly
Efficiency and
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Table I.
Distribution of reviewed
articles from various
sources
Table II.
Year wise publications
Figure 1.
Year wise publication
of studies
Year
No. of publication
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Total
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
02
01
01
04
01
03
01
02
04
10
12
07
11
07
06
13
16
05
106
198
S. no.
No. of Publications
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Years
Country
India
Other
Europe
USA
Cross country
UK
Asia
Australia
China
Table III.
Country wise
publications
No. of publications
24
19
17
12
10
5
3
3
3
Note: Other includes Hong Kong, Singapore, Greece, Spain, Thailand, Taiwan, Iran, Pakistan,
Bangladesh, Japan, Italy, Poland, France and Canada
Source: Based on authors own calculation of reviewed studies given in Table AI
Efficiency and
productivity
No. of Publications
other
20%
US
13%
UK
5%
China
3%
Australia
3%
Asia
3%
199
India
25%
Europe
18%
Figure 2.
Country wise
publications of studies
Croos country
10%
No. of papers
20
37
7
8
3
8
13
6
4
106
Note: Future represents the direction of future research with the application of neural networking,
fuzzy logic, analytical hierarchical process, and bootstrapping in efficiency estimation of the banking
sector
Source: Based on authors own calculation of reviewed studies given in Table AI
Table IV.
Focus areas of literature
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market on efficiency are also gaining consideration in the banking industry. The future
direction of research is emerging with the concepts of fuzzy, neural networking,
artificial intelligence and other operational research based techniques in efficiency and
productivity change of the banking sector.
Figure 3 diagrammatically shows the distribution of focus areas of reviewing studies.
a-i show the breakup of literature in focus areas given in Table IV. a represents the studies
in the focus area of efficiency and productivity estimation, b depicts the studies with the
empirical evidences on determinants of efficiency and productivity, c shows the effects of
deregulation and reforms on efficiency and productivity, d describes studies in bank
branch efficiency, e denotes studies on the effects of mergers and acquisition on
efficiency, f presents the studies on efficiency and shareholder value/share market return,
g shows studies on concepts and models of efficiency and productivity, h describes
studies on literature surveys whereas i denotes studies on future research areas.
Later we classified studies on the basis of various methodologies of research.
We identified four categories of methodologies used by the researchers in existing
literature which are conceptual, descriptive, empirical and exploratory cross-sectional.
Conceptual studies are based on the concepts, models and limitations of particular
approaches (parametric and non parametric) and the techniques used under different
approaches. A descriptive study provides application frameworks and explanations of
different issues of frontier approaches. An empirical study is the study which empirically
estimates and evaluates the efficiency and productivity change using a database. Studies
done on the basis of surveys are defined as exploratory cross-sectional studies. Table V
depicts the distribution of methodologies in studies under review of our study.
Figure 4 shows a snapshot of distribution of methodologies and it clarifies that most
of the studies are empirical in nature.
6%
4%
12%
19%
7%
(e) meregers/acquisition
3%
35%
7%
Figure 3.
Focus area of literature
7%
Methodology
Table V.
Distribution of
methodologies used in
existing literature
Empirical
Conceptual
Descriptive
Exploratory cross sectional
Total
Source: Based on authors own calculation of reviewed studies given in Table AI
No. of papers
83
7
11
5
106
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201
Exploratory cross
sectional
5%
Conceptual
7%
Empirical
78%
Figure 4.
Distribution of
methodologies used in
the reviewed studies
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To Evaluate Efficiency and Productivity Change of Banking Sector: Concept, Determinants, and Effects
Efficiency Measures
Productivity
Allocative efficiency
Technical efficiency
202
Cost efficiency
Profit efficiency
Selection of frontier
Non Parametric
Parametric
DFA
SFA
TFA
FDH
DEA
MPI
Return to scale
CRS
VRS
Input/Output orientation
Input Oriented
Output Oriented
Selection of Input/output
Production approach
Intermediation approach
Operating approach
Determinants
Figure 5.
Conceptual framework of
banking efficiency and
productivity change
Macroeconomic
: GDP, Inflation
Effects
Regulatory: Ownership, Time,
Age, Origin, Deregulation,
Reforms, liberalization
Stock market
return
On the other hand, productivity can be assessed by total factor productivity change
(TFPCH). Table VI shows the efficiency measures estimated in reviewing studies. The
overall technical efficiency (OTE) which includes pure technical efficiency and scale
efficiency is widely evaluated by these studies.
Figure 6 shows the percentage wise composition of various efficiency measures.
3.1.1.1 Selection of frontier approach. After the selection of efficiency measures, the
next step is to choose the appropriate frontier approach for the analysis. In the
literature generally there are two main frontier practices:
(1) parametric approach based on the econometric model specification; the other
one is
(2) non parametric approach based on linear programming techniques.
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In parametric approach, stochastic frontier analysis (SFA) (Aigner et al., 1977; Meusen
and Van Den Broeck, 1977), distribution free approach (DFA) (Berger, 1993) and thick
frontier approach (TFA) (Berger and Humphrey, 1991, 1992) are the most practicing
techniques. data envelopment analysis (DEA) (Charnes et al., 1978) and free disposal hull
(FDH) (Deprins et al., 1984) are the common techniques in non parametric approach.
Similarly productivity can also be assessed by parametric and non parametric
approaches. Parametric approach results production, cost or revenue functions, whereas
non parametric approach follows the index number method. In non parametric approach
there are Fischer (1922) index, Tornqvist (1936) index and Malmquist (1953) index.
Malmquist is the most popular index method to assess TFPCH, which can be further
decomposed into, technological change (TECHCH), efficiency change (EFFCH), pure
technical efficiency change (PEFCH), scale efficiency change (SECH). Around 25 percent
studies from the reviewed literature estimated TFPCH using the Malmquist productivity
index (MPI) (Mukharjee et al., 2001; Sufian, 2011).
Each of the frontier techniques has its own merits and demerits. The parametric
approach allows the effect of random error in the model but it needs to specify the
production function and which leads to subjectivity in the results. Non parametric DEA
Efficiency measure
No. of studies
OTE
CE
PE
41
26
15
Source: Studies based on only empirical assessment of efficiency measures are included in this table
Table VI.
Composition of efficiency
measures in
reviewed studies
18%
Overall Technical Efficiency OTE
50%
32%
Cost Efficiency
Profit Efficiency
Figure 6.
Efficiency measures
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approach is simple and easy to calculate as there is no need to specify any functional forms
but it does not take into account the effect of random error and environmental noise.
Existing literature urge in support of non parametric approach, DEA for assessment
of banking efficiency, while parametric approach SFA is widely applied for CE and
bank branch efficiency (Berger and Humphrey, 1997). DEA is also a main technique to
evaluate the OTE while SFA is frequently used in the reviewed studies to assess cost,
profit and revenue efficiency. Table VII depicts the classification of the approaches
used in the reviewed literature.
Figure 7 clearly shows the popularity of non parametric DEA for the assessment of
banking efficiency. 75 percent of reviewing studies apply DEA to assess the efficiency
and productivity of the banking sector.
3.1.1.2 Scale of operation. Set of inputs-outputs are necessary to assess the level of
efficiency of a given firm or benchmarking of firms in a given set of industry. For this
first we need to define the scale of operation in an industry. If all firms are producing a
constant optimal level of output in an industry then it is said to be a constant return to
scale (CRS). Charnes et al. (1978) developed a DEA model based on CRS, this model
assumes that all the decision-making units (DMUs) are performing on an optimal scale
of operations but it is very unpractical and in real scenario firms produce in variable
return to scale (VRS) of economies. Then further Banker et al. (1984) extended the DEA
model to the case of VRS. Therefore, in DEA method two different models are
Frontier approach
Table VII.
Parametric and non
parametric approach
No. of studies
DEA
SFA
DEA and SFA both
Total
66
16
6
88
Source: Based on the empirical studies only, conceptual and theoretical studies are excluded from
calculation
Figure 7.
Classification of studies
on the basis of frontier
approach
DEA
75%
applicable for different scale of economies of an industry, one is CRS also known as a
CCR model (Charnes et al., 1978) and another is VRS also known as a BCC model
(Banker et al., 1984). The VRS model is widely applied in the literature as it is based on
a more practical aspect of market conditions (Casu and Molyneux, 2003; Sathye, 2003;
Gupta et al., 2008; Sufian, 2009). Some of the researchers comparatively analyzed both
the CRS and VRS approaches in their studies (Grigorian and Manole, 2002; Canhoto
and Dermine, 2003; Luo, 2003).
3.1.1.3 Input-output orientation. Efficiency can be estimated from the two different
aspects one is output maximization while another is input minimization. These aspects
also known as Input orientation and Output orientation. The researcher needs to
specify whether the problem is input oriented (input minimization, cost minimization) or
output oriented (profit maximization, production maximization). Studies in the banking
industry, in general prefer input orientation as any bank may have higher control of its
inputs (expenses) rather than outputs (income). Some studies provide findings for both
orientations; results are same under CRS but different under the VRS approach
(Beccalli et al., 2006; Siriopoulos and Tziogkidis, 2010).
3.1.1.4 Approach for selection of input-output combination. Selection of input-output
combination is a very complex issue, as any DMU may have n number of inputs and
outputs. From the literature we have identified following approaches for the selection
of variables:
.
production approach;
.
intermediation approach;
.
value added approach;
.
asset approach; and
.
operating approach.
Production and intermediation approach are the main approaches used in the literature.
The production approach assumes banks as a production unit, which produce loans,
deposits and other financial services using inputs such as labor (no. of employees,
personnel expenses) and capital (fixed assets and other assets). While the intermediation
approach perceives banks as an intermediary of financial services between borrower and
savers, it generates loans and other earning assets using deposits and labor (Sealey and
Lindley, 1977). The production approach treats deposits as an output variable while
intermediation approach perceives deposits as an input variable. The intermediation
approach is appropriate for banks efficiency as banks serve as an intermediary,
production approach somewhat is more practical for bank branch efficiency (Berger and
Humphrey, 1997). The asset approach is in line with the intermediation approach
(Camanho and Dyson, 2005). Deposits and other liabilities along with labor and capital are
treated as inputs whereas output includes only bank assets generate revenue such as loans
or investments (Ray and Das, 2010). Drake et al. (2006) proposed a value added approach
(revenue approach) in DEA model. In this approach items which create value for the bank
treated as output. Therefore, deposits and loans are treated as output in this approach.
In addition the operating approach also known as income approach perceives bank as a
business unit generating revenue (income) from total cost and expenses incurred. It takes
interest expenses and noninterest expenses as inputs, whereas interest income and
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noninterest income as output variables (Das and Ghosh, 2006). Table VIII presents the
distribution of various approaches for input-output selection under review studies.
It clearly depicts the intermediation approach as a widely applied approach in
banking sector followed by production approach mainly used in bank branches and
frontier techniques. Some of the studies applied mixed combination of production and
intermediation approach resulting in profit approach, marketability approach (Luo, 2003).
Figure 8 diagrammatically shows the distribution of various approaches. Many
authors applied more than one approach in their studies to show the variations in results.
Labor, capital, purchased funds and expenses or prices of labor and capital are most
common input variables found in reviewing studies, whereas loans and advances, other
earning assets and fee based income are common for output specification. Casu et al.
(2004), Molyneux and Williams (2005) also included off-balance sheet items and
securities as output variables. Sathye (2003) developed two different models on the basis
of quantity and value, in quantity based model deposits and staff number taken as input
and net loans, noninterest income taken as output and in value based model interest
expense and noninterest expenses taken as input whereas interest income and
noninterest income as output variables. Some studies disaggregated deposits into retail
and wholesale deposits (Drake and Hall, 2003), transaction deposits and non transaction
deposits (Mukharjee et al., 2001), and loans into commercial loans, industrial loans,
consumer loans, real estate loans (Mukharjee et al., 2001). Debnath and Shankar (2008)
Approach
No. of studies
Production approach
Intermediation approach
Value added approach
Other approach
Table VIII.
Approach for
input-output selection
21
56
15
6
Note: Other includes asset approach, profit approach, operating approach, marketability approach
and mixed approaches
Source: Based on authors own calculation of reviewed studies given in Table AI
Figure 8.
Distribution of approaches
for input-output
combination
Intermediation
57%
Production
22%
treated profit after tax (PAT) as an output variable. Deviating from the same length of
literature Halkos and Salamouris (2004) introduced financial ratios as output variables
without any input variable in the model. Table IX presents the set of input-output
variables often used in literature and studies.
3.1.2 Determinants of efficiency and productivity. Several studies attempt two stage
approach to determine the influencing factors of efficiency and productivity change.
In first stage researchers assess efficiency and productivity change and in the later
stage these efficiency scores and productivity change are regressed on set of
determining variables. These determining factors are categorized into three categories:
(1) bank specific variables;
(2) macro economic variables; and
(3) regulatory variables.
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207
Most common bank specific factors are size, market share, banks profitability and capital
adequacy (Mukharjee et al., 2001; Sensarma, 2006; Das and Ghosh, 2006; Barros et al., 2007;
Staub et al., 2010).
Economic conditions (GDP, GDP per capita, GDP growth rate, per capita income,
inflation, inflation ratio, fiscal deficit) and stock market capitalization are common
macroeconomic variables in the studies (Ataullah and Le, 2006; Jaffry et al., 2007;
Sufian, 2009).
Regulatory specific variables are in general dummy variables in nature, such as
ownership structure, origin, age, financial reforms (Isik and Darrat, 2009; Sufian, 2009,
2011). Table X shows the summary of determining variables of efficiency and productivity.
In this two stage approach, efficiency scores and productivity change scores
are regressed on the determining factors. These scores can be regressed using
Tobit regression (Casu and Molyneux, 2003; Drake et al., 2006; Das and Ghosh, 2006),
Variables
Input
Labor
Capital
Purchased funds
Expenses
Other
Output
Deposits
Loans and advances; investments,
other earning assets
Fee based income
Off balance sheet items
Securities
PAT
Description
No. of full time employees, personnel expenses, provisions for
employees
Fixed assets, liquid assets, total assets, equity
Deposits, borrowings
Interest expenses, operational expenses, noninterest expenses,
other admin expenses
No. of branches, no. of ATMs
Transaction deposits, non-transaction deposits, demand
deposits, fixed deposits, saving deposits,
Commercial and industrial loans, consumer loans, real estate
loans
Interest income, non interest income
Operating lease, securitized debt
Equity, interbank loans
Profit after tax, operating profit
Table IX.
Specification of
input/output variables
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Variables
Bank specific variables
Banks profitability
208
Table X.
Variables for
determinants of efficiency
and productivity
Description
Return on assets (ROA), return on equity (ROE), operating profit, business
per employees, net operating income, leverage
Total deposits
Total assets
Total loans over total assets
Loan loss provisions over total assets
Capital adequacy ratio, book value of shareholder equity over total assets
Total capital over total assets, equity over total assets
Market share
Size
Liquidity
Asset quality
Capital adequacy
Risk
Macro economic variables
Economic conditions
GDP, GDP per capita, GDP growth rate, per capita income, inflation,
inflation ratio, fiscal deficit
Market capitalization
Stock market capitalization
Regulatory variables
Ownership
Dummy for public, private, and foreign ownership
Specialization
Specialization activity of banks (investment banking, corporate banking)
Origin country
Dummy for country specific origin
Branch region
Dummy for region of branches (rural/urban)
Age
New/old bank
Time
Time trend
Financial reform/policy
Dummy for regulatory reforms in a particular year
reform
Listed bank
Listed in stock exchange
Source: Based on authors own calculation of reviewed studies given in Table AI
Fixed and random effect panel data regression (Fiordelisi and Molyneux, 2010a, b;
Staub et al., 2010; Bonin et al., 2005), ordinary least square (OLS) (Sufian et al., 2007;
Ataullah and Le, 2006), generalized method of moments (GMM) (Casu and Girardone,
2010), logit and probit regression (Barros et al., 2007; Isik and Darrat, 2009).
General linear regression is not at all appropriate regression technique in the second
stage efficiency analysis as the dependent variable (efficiency score) is a range variable
(0 to 1) and it is censored variable. In logit and probit regression techniques dependent
variable (efficiency score) converted into a dummy group of most and least efficient,
with 1 for the most efficient and 0 for the others. Most efficient DMU (any bank in
sample) scores 1 on efficiency frontier of the peer group. Table XI depicts the second
stage regression techniques applied in empirical studies.
Figure 9 diagrammatically shows the techniques used, and concludes panel data
regression and Tobit are widely applied techniques whereas few studies also applied
GMM, logit, probit and stochastic regression to assess the impact of determinants on
efficiency and productivity change of the banking industry.
3.1.3 Impact of efficiency and productivity change. Several authors studied the impact
of efficiency and productivity change on stock market return, shareholder value, mergers
and acquisition.
3.1.3.1 Efficiency and shareholder wealth. Banks like other business units also seek
to maximization of shareholder wealth and therefore Fiordelisi (2007) developed a new
measure of bank performance, termed as shareholder value efficiency. A bank is said
Efficiency and
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209
No. of studies
Tobit regression
Panel data regression
Simple regression
Other
10
11
6
13
Note: Other includes GMM estimation, feasible generalized least square (FGLS), logit, probit, and
stochastic regression
Source: Based on authors own calculation of reviewed studies given in Table AI
Table XI.
Second stage regression
techniques
Other
33%
OLS
15%
Panel
27%
Figure 9.
Second stage regression
techniques
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the post mergers banks productivity of Malaysian banking industry using MPI and
found that eight out of total ten merged banks improved their productivity. While
Halkos and Salamouris (2004) reported in their study on Greece banking that efficiency
increases with the mergers and acquisition. Kaur and Kaur (2010) studied the Indian
banking sector and assessed the impact of mergers on CE and found that merger led to
a higher level of cost efficiencies for the merging banks.
3.1.3.4 Bank branch efficiency. Apart from the efficiency of banking institutions as a
whole, the literature also contributes towards the efficiency of bank branches. The
production approach in general is more applicable in bank branch efficiency as output
is measured in terms of the number of transactions (Zenios et al., 1999; Camanho and
Dyson, 1999). Camanho and Dyson (2005) applied production and value added model
to assess CE of 144 bank branches using DEA whereas Paradi et al. (2011) applied
production, intermediary and profitability model of DEA. Number of branches, the
number of administrative and clerical staff and operating expenses are main input
variables whereas the number of transactions, number of ATMs and number of
accounts, deposits, loan are main output variables. Manandhar and Tang (2002)
developed a framework for bank branch efficiency and benchmarking including
internal service quality aspects of banking. Meepadung et al. (2009) focused on
information technology (IT) based banking services and therefore consider employee
perceptions of service quality as an input variable. This study further applied
exploratory factor analysis on qualitative variables and then DEA to assess operating
and PE of bank branches.
4. Way to future
Application of operational research and artificial intelligence techniques in the DEA and
SFA are paving a new way to future direction of research. With the application of fuzzy
logic, neural networking, Analytical hierarchical process (AHP) and bootstrapping,
results of studies are providing holistic insights of banks performance and efficiency.
Fuzzy and artificial intelligence techniques deal with the imprecise and ambiguous data
in the DEA (Hatami-Marbini et al., 2011). Azadeh et al. (2011) integrated AHP with DEA
to assess and optimize personnel productivity in large industrial bank of Iran. This
integrated approach of DEA and AHP is capable of dealing with both qualitative and
quantitative data in banking. AHP is more purposeful in the case of qualitative data
modeling in banking efficiency and productivity. The bootstrapping procedure is widely
applied in DEA research to overcome the dependency problem in DEA efficiency scores
and sensitivity analysis of second stage regression results (Casu and Molyneux, 2003;
Tortosa-Ausina et al., 2008; Matthews and Zhang, 2010).
5. Conclusion
Efficiency is an indicator of performance and frontier analysis techniques are recognized
as an important technique for performance measurement in banking and financial
institutions. Country wise publication of studies depicts good number of studies in
developed and developing nations but in emerging areas of shareholder value efficiency
and market return evidences, developing nations are lagging behind. Most of the
cross-country studies are based on European countries. Around 80 percent reviewed
studies are empirical in nature conducted in different countries and across countries.
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(The Appendix follows overleaf.)
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3
4
6
7
8
9
10
11
12
13
14
15
16
17
18
19
a
a
a
a
a
a
a
a
a
a
a
a
a
a
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Focus
area Methodology Findings
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1
2
Author (year)
Table AI.
Comprehensive snapshot
of 106 reviewed studies
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Appendix
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33
34
35
32
31
30
29
26
27
28
25
23
24
22
20
21
S. no.
Empirical
Empirical
b
b
b
b
b
b
b
b
Empirical
b
b
b
b
b
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
a
b
FDI has a negative short term effect but positive long term effect on TFP
change
Inclusion of non-traditional outputs does not alter the directional impact
of environmental variables on bank inefficiency
Foreign banks have been the worst performer as compared with state
owned and private banks
Ownership explaining the efficiency differential of banks
Capital adequacy ratio shows positive association with efficiency
Strong presence of sigma and beta convergence in CE levels of public
sector
Capital adequacy ratio and profitability show positive relation with
efficiency
(continued)
Focus
area Methodology Findings
Author (year)
Efficiency and
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Table AI.
Table AI.
38
39
40
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45
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47
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49
50
51
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Author (year)
b
b
b
b
b
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Descriptive
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
State bank group and foreign banks are more efficient than their
counterparts
Bank size, ownership and being listed on stock exchange have positive
impact on PE
Competition has a positive impact on productivity for the old Indian
private banks
Smaller banks are less efficient and highly DEA-efficient banks have a
high equity to assets and high return to average equity ratios
India and Bangladesh experienced immediate and sustained growth in
technical efficiency, whereas Pakistan endured a reduction in efficiency
during study period
Efficiency and technology change is consistent in Indian banking sector
Banks are efficient in generating earning asset due to high non
performing loans
Efficiency is positively associated with expense preference behavior and
economic condition whereas negatively associated with loan intensity of
banks
Productivity is positively associated with being listed whereas negative
with foreign ownership, and also foreign banks depicts a productivity
regress during study period
Bootstrapping and MPI is applied to study TFP change in the banking
sector of China
Differential impacts of environmental factors on different size groups
and financial sectors
The new banks dominate the old banks in terms of average efficiency
scores
Big four banks are the least efficient whereas foreign banks are the most
efficient
Downward trend in productivity during the study period
Negative correlation between problem loan and efficiency
Small banks are more profit efficient than large banks
(continued)
Focus
area Methodology Findings
220
37
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69
70
71
65
66
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56
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55
53
S. no.
b
b
b
b
b
c
c
c
c
c
c
c
d
d
d
d
d
d
d
Empirical
Empirical
Empirical
Conceptual
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Focus
area Methodology Findings
Author (year)
Efficiency and
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Table AI.
Table AI.
73
74
75
76
77
78
79
80
81
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83
84
85
86
87
88
89
90
91
92
93
Author (year)
g
g
g
g
g
g
g
g
f
f
f
f
f
f
e
e
e
Descriptive
Conceptual
Descriptive
Conceptual
Descriptive
Descriptive
Conceptual
Descriptive
Descriptive
Conceptual
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
Empirical
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area Methodology Findings
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72
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g
g
g
h
h
h
h
h
h
i
i
i
i
Empirical
Empirical
Conceptual
Exploratory
cross
sectional
Exploratory
cross
sectional
Exploratory
cross
sectional
Exploratory
cross
sectional
Exploratory
cross
sectional
Descriptive
Conceptual
Empirical
Descriptive
Descriptive
Focus
area Methodology Findings
Author (year)
Notes: a efficiency and productivity estimation; b empirical evidences on determinants of efficiency and productivity; c efficiency,
productivity: deregulation and reforms; d bank branch efficiency; e efficiency and mergers/acquisition; f efficiency and shareholder value,
market return; g efficiency and productivity; concepts and models; h literature survey; i future research areas
105
106
102
103
104
101
100
99
98
96
97
95
94
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