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Performance measurement by Data Envelopment Analysis (DEA): A study of banking sector in Pakistan

Jahanzaib Sultan Lecture Dept. Banking & Finance GCUF Student of MS-FIN IIU Islamabad, Pakistan Muhammad Bilal Research Fellow, Faculty of Business administration, IIU Islamabad, Pakistan Dr. Zaheer Abbas Assistant Professor Faculty of Management Sciences International Islamic University Islamabad, Pakistan. Abstract Most of the studies, in the past have solely focused on efficiency of the firms / banks. Those were intended to find out either the DMUs are efficient or not. In Pakistan, studies were conducted on the basis of stage-1 analysis and those were only for the present data. As a result, this research, using the enhanced and innovative idea of 2-stage DEA frontier approach that differentiate among the efficiency and effectiveness, evaluates the performance of 10 listed banks of Pakistan for the past 5 years. After empirically testing the idea above, we found the results, as expected, that the bank having efficiency does not always bear effectiveness. No evidence of such correlation was found. Key words: Data Envelopment Analysis, Bank performance, Decision making unit, Financial ratio analysis, efficiency, effectiveness. 1. Introduction The competitive environment in financial sector, specially banking sector, has arisen the need to introduce new methods to appraise the bank performance in context of risk and return which are part and parcel for this particular sector. Previously, the regulatory authority was using simple financial ratios in order to evaluate the bank performance. Financial statement analysis seems to be a good measure, though, it has a disadvantage. In this approach, there is a comparison of each single ratio with some benchmark ratio, while assuming that other factors are kept constant and the benchmark selected is the best suitable choice. As a remedy to the above problem a variety of financial ratio are calculated and their combination is used to form an overall picture of the firm. It is proven easy to calculate the financial ratios from the financial statements but it is a complex rather difficult task to aggregate the result and process of these ratios. A very learned imagination as well as the experienced judgment is also needed. This has become
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even more difficult with the rapid change in economic conditions. In this situation, the need for more flexible approach, to evaluate the firm s financial position and performance, has got its significance enriched. A number of studies have been conducted in the past to use the statistical methods (such as logit, probit analysis) with these financial ratios that help in generating early-warnings or wake-up call for the inefficient banking institutions (e.g. Jordan and Henderson, Espahbodi, Abrams and Huang). Data envelopment analysis (DEA), computes the efficiency of the firm by transforming its inputs into outputs relative to its peers, has provided a new and fine mechanism for this purpose as proposed by Charnes et. al (1978). Since the DEA model was proposed, it has been used widely and extensively by different researchers, in non-profit organizations such as in universities by (Sarrico, C.S and Dyson, R.G 2000), health organizations by (Harris, Ozgen and Ozcan 2000) and law enforcement forces (Thanssoulis, 1995). Afterwards, its application is expanded to appraise profit organizations, such as banking industry (Chen and Yeh, 1998, Sherman and Gold, 1985 and Oral and Yolalan, 1990), securities (Lin, Chi-Huang 1998), insurance (Meric, G. and Meric, I. 2001). But most of these above mentioned studies have done one-stage efficiency analysis. DEA was further expanded for two-stage efficiency as well as effectiveness of the firm by Chein-Ta Ho and Dauw-Song Zhu in 2004. This research paper focuses on the two-stage DEA model in order to evaluate the efficiency of the Pakistani Banks. Earlier, this approach was been used by Abdul Qayyum. The variable used in above said studies were technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE), but it was a one stage analysis. The data set was up-to 2005. 1.1 Banking in Pakistan When independence of Pakistan occurred, Pakistan got Habib Bank Limited in inheritance, which was established in 1941 Bombay (Mumbai). After the creation of Pakistan the bank was shifted to Karachi. Next year of creation, the Pakistan government established a to regulate, i.e; central bank, named as State Bank of Pakistan (SBP). The banks in Pakistan were nationalized by the government of Pakistan in 1974. The aim was to make the credit available for the high priority sectors of economy (Haque and Kardar, 1993). This step from government left no room for the private sector in banking business. The act of nationalization was not proven to be a good one for the particular sector as it affected the performance negatively. After continuous efforts and evaluation of the nationalized banks government withdrew its decision. In order to improve the efficiency of the sector and to promote the competition the first step was taken and twenty (20) banks were allowed to commence their business which includes ten (10) domestic banks. The process for denationalization / privatization of Nationalized Commercial Banks (NCBs) was also initiated. Now, most of the banks are privatized, including three big names of HBL, MCB and ABL. In Pakistan, the banking industry has shown a brisk growth in past decade. This intense competitive environment leads to the change in the sector s behavior towards innovations, the product offered, product development and the services offered to the customers.

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Banking industry is the back bone of the whole financial system of any country and serving as a bridge between the outer world and financial resources. Thus, the evaluation and appraisal of its efficiency, as well as effectiveness, both are very vital for this competitive environment. The rest of the paper is organized as follows. The next section describes the relationship between DEA approach, traditional ratio analysis, one-stage and two-stage DEA model. Following section defines the evaluation process and its corresponding factors / variables (input and outputs). Next section is for DEA methodology followed by empirical analysis of 10 Pakistani banks for last 5 years, i.e 2005-2009. The final section explains our conclusions. 2. The Literature Review The titanic literature on measurement of financial performance of banks has provided two ways to calculate the banks performance in terms of their efficiency and effectiveness. First method is to show a comparison between financial ratios, balance sheet and income statement items of different banks or different time periods of same bank. Avkiran, (1995) argued that, mostly the measurement of financial performance of financial institutions and all categories of banks are done by using a blend of financial ratios, making a point of reference and measuring performance against budget or any combination of these techniques. Charles Okeahalam and Victor Murinde (2004) evaluated the financial performance by using balance sheet and income statements items of the African Development Bank in his paper. There are three measurements which are used to draw the picture of financial situation of a bank. The profits of a bank or net income of a bank is the first method for analyzing the performance and this technique is used by (Eastlack and McDonald, 1970; Thune and House, 1970; Ansoff, 1971; Herold, 1972; Karger and Malik, 1975). The second method is return on equity which is calculated through dividing net income by shareholders equity and this technique is used by (Earle and Mendelson, 1991). They argued that the ultimate measure for the performance of any bank is not the number of branches it has or the total worth of all of its assets but the actual measure is its return on shareholder equity. Some other related articles agree that ROE should be used to calculate the financial performance of any bank. (Heskett, 1986) & (Channon, 1978) both supported to use ROE for the measurement of financial performance of service organizations and banks are typically service organizations. The third method to measure financial performance is Deposit growth used by (Willie and Shirly, 1997; Lenzner and Mao, 1995; Gup and Whitehead, 1989). Deposit growth means the percent change in consumer deposits for each bank. (Johnson and Johnson, 1989) argued that 70 to almost 90 percent of the funds are generated by the consumer deposits of the banks and thus a substantial amount of designed actions are committed to sustaining this purpose. Stock market return and return on assets both measures are used by (Lambert, Larcker, and Janakiraman, 1992; Barro and Barro, 1991; Keats, 1990; Sloan, 1993; Shrieves and Lubatkin, 1986) to evaluate bank financial performance. Statistical methods (like discriminant, logit, and probit analyses) are attempted to use by a number of studies with financial ratios to make early-warning signals for concerned banking institutions (Henderson and Jordan, Huang and Abrams, Espahbodi).

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Financial ratio analysis, however, has one disadvantage. That is, each single ratio have to be weighed against some benchmark ratios one at a time whereas one believes that other factors are fixed and the benchmarks chosen are suitable for comparison. To conquer this problem different financial ratios are usually required to be computed and combined to form a meaningful picture of a firms financial position. Although the calculation of a set of financial ratios is a comparatively easy job, the aggregation of those ratios can be a quite complicated process involving imagination and experienced judgment. Changing economic conditions have made such aggregations even more difficult, increasing the need for a more flexible way to express a banks financial position. The second one is advanced and improved way to evaluate the effectiveness and efficiency of the banks by Data Envelopment Analysis DEA model. Data envelopment analysis (DEA) was proposed by (Charnes, 1978) and it is a linear programming technique made particularly for the evaluation, and comparing the performance of comparable organizations. Free disposal hull (FDH) analysis proposed by (Deprins, 1984) is a close mixed technique by integers, developed for the same objective. Both the methods can evaluate and compare the performance of organizations that consumes many resources to provide several services; this makes them very useful in calculating the financial performance of commercial banks. (DEA) is a mathematical approach for synchronizing the relationships among several inputs and several outputs and is a sure method to measure performance of bank (Charnes 1990; Seiford and Zhu, 1999). There is much work on basic and applied research in DEA. People have taken its use in many non-profit organizations like education (Sarrico and Dyson, 2000), hospitals (Harris et al., 2000), police forces (Thanassoulis, 1995). Later, uses are seen in profit organizations, like mutual fund industry (Tarim & Karan, 2001; McMullen & Strong in 1998), security (Lin: 1998), insurance (Mahjan: 1991), medicine (Valdmenis & Grosskopf: 1987), stocks (M and M, 2001), and airport industry (Huang & Huang, 2000; Schefczyk, 1993), banks(Oral and Yolalan, 1990; Gold & Shermen, 1985; Chien and Dauw, 2004; Golany and Storbeck,, 1999). So, the attention of this paper is altered from attempts to describe performance on the basis of simple ratios, return on investment or return on asset to a multidimensional outlook. The paper uses a recently developed type of DEA presented by (Cuper et al, 2000). 2.1 Financial statement analysis (FSA) and DEA approach People rely on FSA believing that it will reflect the results of firm s activities shown in their financial statements. So, one could get a picture of firm s performance from its financial statements and the reasons behind this. Financial statements of firm are the source to get information about the firm s management performance and its future prospects. The given information can be helpful for the stakeholders subject to accuracy and completeness of the expressed accounts. Criticism on this approach expresses that there is no standard criterion available to select the best ratio among the others. Say, if there are two firms A and B, it might be possible that for one ratio X firm A is efficient, while, for the other ratio Y firm B is better than firm A. So, there is instability in the above said approach. DEA one-stage is another option for the researchers but again it only measures the efficiency of the firm. Necessarily, the firm should be efficient as well as effective for
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better performance. Thus, an extension to this one-stage DEA is needed that separates the efficiency and effectiveness. The later, two-stage DEA evaluation process is composed of the level of assets required to generate sales (loans and advances) in first stage and generate profit (effectiveness) in the second one. The selection of inputs and output variables is prejudiced by literature on DEA application in the banking industry. The variables used in the previous literature and evaluations are listed in TABLE 1. The evaluation process consists of two levels or stages. In stage-1 evaluation, efficiency is being measured, i.e the ability of the bank to generate advance and deposits with respect to its capital stock, assets, number of branches and number of employees. The stage-2 focuses on the evaluation of effectiveness i.e net-income, interest-income and non-interest income. 2.2 The DEA Model The data envelopment analysis (DEA) is basically a mathematical programming approach used for the evaluation of firms performance. With the help of pragmatic values (inputs and outputs), it tries to determine the envelopment surface for the firms in the sample. The firm, that lye on the surface, is deemed to be efficient having a value of unity (1). The deviation from the estimated frontier is inefficient. Banks in the sample for DEA approach are referred to Decision Making Units (DMUs). We have used the static approach of DEA model built in DEAFrontier analyst software developed by Joe Zhu and below is the mathematical approach given to evaluate the efficiencies of all DMUs. Methodologically, the characteristics of DEA can be described through the original model developed by Charnes, Cooper and Rhodes7. Consider N units (each is called a Decision Making Unit, DMU) that convert X inputs into Y outputs, where X can be larger, equal or smaller than Y. To measure the efficiency of this converting process for a DMU, Charnes et al. propose the use of the maximum of a ratio of weighted outputs to weighted inputs for that unit, subject to the condition that the similar ratios for all other DMUs be less than or equal to one. That is, Max = ..(1) Subject to 1; 0; i = 1,..., I; n = 1, j = 1, , N, ,J ..(2) ..(3)

Where, w = weights of all outputs from j = 1, ,J u = weights of all inputs from i = 1,..., I y = output variables x = Input variables

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3. Methodology and Analysis 3.1 Data and sample We have selected 10 commercial banks of Pakistan including nine private sector banks (Allied Bank, Askari Bank, Atlas Bank, Bank Alfalah, Faysal Bank, Habib Bank, KASB Bank, Muslim commercial Bank, United Bank Limited) and one public sector bank (National Bank of Pakistan). All the banks are listed in Karachi stock exchange (KSE); the vital stock exchange market of Pakistan. Data for the empirical study is collected from annual reports issued by all commercial banks from 2005-2009 which provided all sufficient information for the study. 3.2 Software used for DEA efficiency In order to calculate the DEA efficiency values for the data of all DMUs in the sample, the DEA Frontier Analyst software is used for both stages. The above said software was developed by Joe Zhu, consisting of a series of DEA models and is an Add-In for Microsoft Excel. To use this software with MS-Excel, it has to be embedded in the later software. The Frontier analyst software is based on the revised CCR model. According to this, if the calculation for a DMU is unity (1), it is said to be highly efficient. Any value less than unity will represent less efficiency. 3.3 The correlation among input and output variables Prerequisite for this approach is the selection of the inputs and outputs must be reasonably heedful. For this purpose, we found the correlation coefficient for the selected variables, both for stage-1 and stage-2. The results, shown in TABLE-2 and TABLE-3, clearly identifies that the variables are highly correlated. As the study enveloped the data for five years, we use the average correlation coefficient for the whole data set. The average correlation coefficients, between input variable (capital) and output variables (advances and deposits), are below 0.80. But that value does not mean that they are less correlated. This is just because of the value of 2009. For all other years, the findings were above 0.80 (i.e. 0.82, 0.84, 0.93, 0.90 and 0.84, 0.83, 0.80, 0.91). 3.4 The evaluation of DEA model We have calculated bank performance as a multiple of efficiency and effectiveness and ranked all the DMUs (banks) according to their performance for the past five years (2005-2009). TABLE-4 shows the result for DEA frontier analyst software, for the year 2009, of both stages (stage-1 and stage-2). If we look at the values, extracted from analysis, they reflect that for stage-1 (efficiency), seven out of ten banks are working efficiently, i.e. ACB, ATB, BAF, FBL, HBL, UBL and NBP (securing the value of unity). The other three banks (MCB, ABL and KASB) were appeared to be less efficient as compared to peers. But in stage-2 analysis, only three DMUs are effective out of ten. By combining the found results for both stages, we left with only two banks; those are efficient as well as effective. In past, for year 2008, only two banks were found effective and efficient, i.e. MCB and NBP (see TABLE-5). In year 2007, four banks were found to be efficient for both stage1&2. In years, 2006 and 2005, DEA efficient banks were only three (see TABLE-7 & 8).

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Shortening the results, the only consistent bank for the period of study (5-years) was NBP, placed at rank 1 (see TABLE-4, 5, 6, 7 & 8). The second more consistently performing bank than other DMUs, but less than NBP, was MCB. TABLE-9 shows the result for the evaluation of performance for all DMUs among themselves. 3.5 The relation between efficiency and effectiveness We can make a matrix between efficiency and effectiveness just like BCG matrix developed by Boston Consulting Group to illustrate the high performance banks and low performance banks. From figure-1 it has been observed that nine of ten banks are in the high performance group which is characterized by high effectiveness (50%) and high efficiency (50%). On the other hand, only one of the ten companies is characterized by low efficiency and low effectiveness and placed in the Low Performance group. 4. Suggestions to improve performance The DEA efficiencies of all DMUs indicated which banks were inefficient and which were efficient. Most of the banks appear to be efficient for the stage-1 of DEA approach but only some of them sustain their position in stage-2. DEA Frontier analysis, for the selected DMUs, shows that a bank may be efficient but that does not ensure its effectiveness as well. It is fairly possible that it is ineffective and may harm the overall performance of the bank (stage-2). The DMUs, failing to qualify in stage-2 analysis should work on their effectiveness, i.e. by improving the quality of advances and reducing the cost of deposit. The other one is to increase their net income, non interest income and interest income. But both solutions are closely related. 5. Conclusion and Remarks In this paper we used a lately developed DEA model planned by Cooper in 2000 to evaluate the performance of ten banks listed in Karachi stock exchange (KSE), Pakistan. The results illustrate that for the past five years all banks showed high efficiency in the stage1 and only few of them showed high effectiveness in the stage 2 by the DEA efficiency analysis model. As we know that our output variables (advances and deposits) in stage1 were the inputs of second stage. If we decrease them to show better effectiveness in second stage then it will affect the results in stage1 by lowering the efficiency score. So we can conclude that it is a perfect model to calculate the performance of a bank by splitting up the performance as a multiple of efficiency and effectiveness. For the practical aspect, this paper may help the decision makers of banks, focusing on different activities of banks, to enhance financial performance position. The empirical results may be helpful for management of commercial banks to make smart financial strategies to achieve required financial performance. This study also examines that all the variable are highly correlated that means that they have a positive influence on each other. That is if Assets, Capital, Employees, and Branches of a bank is increasing this will cause a boost in Advances and Deposits and second stage shows that due to increase in Advances and Deposits non-interest income, Interest income and Net Income will enlarge.

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References A. Charnes, W. Cooper and E. Rhodes (1978). Measuring efficiency of decision making units. European journal of operational research, 2 , 429-444. B. A. Abrams and C. J. Huang (1987). Predicting bank failures: the role of structure in affecting recent failure experiences in the USA. Applied Economics, 19, 12911302. Bhattacharya, A., Lovell, C.A.K. and Sahay, P. (1997). The impact of liberalization on the productive efficiency of Indian commercial banks. European Journal of Operational Research, 98 No. 2, 332-45. C. Jordan and J. R. Henderson (1990). Evaluating the financial health of midwestern banks. Ohio CPA Journal, 49, 42-46. Charnes, A., Cooper, W.W. and Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2, 429-44. Cooper, W.W., Seiford, L.M. and Tone, K. (2000). Data Envelopment Analysis: A Comprehensive Text with Models, Applications. References and DEA-Solver Software, Kluwer Academic Publishers, Boston, MA. Chen, Tser-Yieth and Yeh, Tsai-Lien (1998). A study of efficiency evaluation in Taiwan s banks. International Journal of Service Industry Management, 9, 1-8. Chien-Ta Ho and Dauw-Song Zhu (2004). Performance measurement of Taiwan s commercial banks. International Journal of productivity and performance Management. 53, 425-434. Harris, J., Ozgen, H. and Ozcan, Y. (2000). Do mergers enhance the performance of hospital efficiency. Journal of the Operation Research Society, 51, 801-11. Haque, Nadeem Ul and Shahid Kardar (1993). Constraints to the Development of Financial Markets in Pakistan. IMF Mimeo Meric.G. & Meric. I. (2001). Risk and return in the world s major stock markets. Journal of Investing, 10, 62-67. Mukherjee, A., Nath, P. and Pal, M.N. (2002). Performance benchmarking and strategic homogeneity of Indian banks. International Journal of Banking, 20, 122-39. Oral, M. and Yolalan, R. (1990). An empirical study on measuring operating efficiency and profitability of bank branches. European Journal of Operational Research, 46, 282-94. P. Espahbodi (1991). Identification of problem banks and binary choice models. Journal Banking and Finance, 15, 53-71. Parkan, C. (1987). Measuring the efficiency of service operations: an application to bank branches. Engineering Costs and Production Economics, 12, 237-42. Seiford, L.M. and Zhu, J. (1999). Profitability and marketability of the top 55 US commercial banks. Management Science, 45, 1270-88. Sarrico, C.S. and Dyson, R.G. (2000). Using DEA for planning in UK universities: an institutional perspective. The Journal of the Operational Research Society, 51, 789-800. Sherman, H.D. and Gold, F.(1985). Bank branch operating efficiency: evaluation with data envelopment analysis. Journal of Banking and Finance, 9, 297-315. Thanassoulis, E. (1995). Assessing police force in England and Wales using data envelopment analysis. European Journal of Operational Research, 87, 641-58.

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Abdul Qayyum (2008). Financial Sector Reforms and the Efficiency of Banking in Pakistan. [online] Available: http://www.saneinetwork.net/research/sanei8/abstract8.asp#11 http://www.sbp.org.pk/stats/stat-bal-sheet.htm

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Annexure
Author Country of study Input variable Assets, branches, operating cost, deposits, interest expenses Employees, assets, capital stock Employees, expenses, space Rent Employees, expenses, space, rent, terminals

Output variable Interest income, non interest income Revenues, profits No. of transactions No. of transactions, customer response, corrections No. of transactions Advances, deposits, investment Deposit, net income, advance, non-interest income, interest spread No. of transactions Advances, Deposits, noninterest income, Interest income, Net Income.

Chen and Yeh (1998) Seiford and Zhu (1999) Sherman and Gold (1985) Parkan (1987)

Taiwan USA USA

Canada

Giokas (1991) Bhattacharya et al. (1997)

Greece

Employees, expenses, rent Interest expenses, operating expenses Net worth, borrowings, operating expenses, employees, branches Employees, terminals, no. of accounts, credit applications

India

Mukherjee et al. (2002)

India

Oral and Yolalan (1990) Chien and Dauw (2004)

Turkey

Taiwan

Assets, Capital, Employees, Branches, Advances, Deposits

Table 1: Birds eye view of the variables used in previous literature.

INPUTS OUT PUTS ADVANCES

CAPITAL

ASSETS

EMPLOYEES

BRANCHES

0.79

0.990*

0.97*

0.95* 0.91*

0.995* 0.95* DEPOSITES 0.78 Note: *significant at 1% level of significance

Table 2: Correlation coefficient of stage -1 (input and out put variables).

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INPUTS OUTPUTS NET INCOME INTEREST INCOME NON INTEREST INCOME 0.89* 0.97* 0.94* 0.87* 0.95* 0.94* ADVANCES DEPOSITS

Note: *significant at 1% level of significance Table 3: Correlation coefficient of stage -2 (input and out put variables).

BANKS(DMUs)

STAGE1 (EFFICIENCEY) 1.00 1.00 0.96 1.00 1.00 0.98 1.00 1.00 0.88

STAGE2 (EFFECTIVENESS) 1.00 1.00 1.00 0.86 0.85 0.80 0.70 0.66 0.48

PERFORMANCE

RANK

NBP UBL MCB FBL HBL ABL B AF ACBL KASB

1.00 1.00 0.96 0.86 0.85 0.79 0.70 0.66 0.42 0.09

1 1 2 3 4 5 6 7 8 9

ATB 1.00 0.09 Table-4: Cumulative performance appraisal, 2009

BANKS(DMUs)

STAGE1 (EFFICIENCEY) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.97 1.00 1.00

STAGE 2 (EFFECTIVENESS) 1.00 1.00 0.90 0.85 0.84 0.68 0.67 0.66 0.62 0.50

PERFORMANCE

RANK

MCB NBP UBL HBL FBL ACBL ABL KASB B AF ATB

1.00 1.00 0.90 0.85 0.84 0.68 0.67 0.64 0.62 0.50

1 1 2 3 4 5 6 7 8 9

Table-5: Cumulative performance appraisal, 2008

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STAGE1 (EFFICIENCEY) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 STAGE 2 (EFFECTIVENESS) 1.00 1.00 1.00 1.00 0.90 0.84 0.75 0.73 0.64

BANKS(DMUs)

PERFORMANCE

RANK

ACBL FBL MCB NBP UBL HBL KASB B AF ABL

1.00 1.00 1.00 1.00 0.90 0.84 0.75 0.73 0.64 0.61

1 1 1 1 2 3 4 5 6 7

ATB 0.80 0.76 Table-6: Cumulative performance appraisal, 2007

BANKS(DMUs)

STAGE1 (EFFICIENCEY) 1.00 1.00 1.00 0.95 1.00 1.00 1.00 1.00 1.00 0.76

STAGE 2 (EFFECTIVENESS) 1.00 1.00 1.00 1.00 0.92 0.91 0.71 0.69 0.54 0.33

PERFORMANCE

RANK

FBL MCB NBP KASB HBL UBL ABL ACBL B AF ATB

1.00 1.00 1.00 0.95 0.92 0.91 0.71 0.69 0.54 0.25

1 1 1 2 3 4 5 6 7 8

Table-7: Cumulative performance appraisal, 2006

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BANKS(DMUs)

STAGE1 (EFFICIENCEY ) 1.00 1.00 1.00 1.00 0.97 0.97 1.00 1.00 0.96

STAGE 2 (EFFECTIVENESS ) 1.00 1.00 1.00 0.89 0.80 0.75 0.64 0.50 0.50

PERFORMANCE

RANK

FBL MCB NBP HBL UBL ABL ACBL B AF KASB

1.00 1.00 1.00 0.89 0.77 0.73 0.64 0.50 0.48 0.29

1 1 1 2 3 4 5 6 7 8

ATB 0.29 1.00 Table-8: Cumulative performance appraisal, 2005

DMUs NBP MCB FBL UBL HBL ACBL ABL KASB B AF ATB

2009 1 0.96 0.86 1 0.85 0.66 0.79 0.42 0.7 0.09

2008 1 1 0.84 0.9 0.85 0.68 0.67 0.64 0.62 0.5

2007 1 1 1 0.9 0.84 1 0.64 0.75 0.73 0.61

2006 1 1 1 0.91 0.92 0.69 0.71 0.95 0.54 0.25

2005 1 1 1 0.77 .89 0.64 0.73 0.48 0.5 0.29

AVE 1.00 0.99 0.94 0.90 0.87 0.73 0.71 0.65 0.62 0.35

RANK 1 2 3 4 5 6 7 8 9 10

Table-9: Average performance appraisal and ranking, 2005-2009

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E F F I C I E N C Y 0 0.5 E F F E C T I V E N E S S Figure 1: BCG Matrix for efficiency and effectiveness. 1 0.5 Low Performance High Performance 1

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1) Financial data of all commercial banks 2005-2009
1 Net Income 7,122,000 4,157,000 4,076,000 4,397,000 3,090,000 2 Net Income 1,416,773 386,225 2,681,012 2,249,974 2,021,996 3 Net Income 13,400,741 15,614,020 10,084,037 12,700,315 9,646,549 ALLIED BANK LIMITED Interest Income 18,700,000 14,011,000 11,108,000 10,423,000 7,867,000 N-I income 5,958,000 4,152,000 3,920,000 2,449,000 1,940,000

year 2009 2008 2007 2006 2005

Assets 418,374,000 366,680,000 320,110,000 252,027,000 192,574,000

Deposits 328,875,000 297,475,000 263,972,000 206,031,000 161,410,000

Capital 7,110,000 6,464,000 5,386,000 4,489,000 4,489,000

Advances 237,344,038 212,972,008 170,743,654 143,383,499 113,630,400

Employees 8,713 8,325 8,181 7,139 6,909

Branches 779 766 757 742 741

ASKARI COMMERCIAL BANK LIMITED Interest Income 9,033,000 7,742,594 6,457,617 5,619,608 4,502,324 N-I income 2,555,000 2,707,000 4,565,496 2,139,254 1,552,566

Assets 2009 2008 2007 2006 2005 254,330,000 206,191,138 182,171,885 166,033,588 145,099,907

Deposits 205,934,260 167,676,572 143,036,707 131,839,283 188,794,690

Capital 5,073,000 4,058,774 3,006,499 2,004,333 1,507,018

Advances 128,101,357 123,023,379 92,653,899 84,162,090 73,272,718

Employees 7,270 7,560 6,808 5,226 4,533

Branches 226 200 150 122 99

HABIB BANK LIMITED Interest Income 42,670,534 36,779,477 31,327,064 30,481,703 25,015,603 N-I income 11,159,612 11,282,695 10,023,164 8,489,496 7,854,300

Assets 2009 2008 2007 2006 2005 863,778,621 757,928,389 691,991,521 590,291,468 528,893,905

Deposits 682,750,079 597,090,545 531,298,127 459,140,198 432,545,165

Capital 9,108,000 7,590,000 6,900,000 6,900,000 6,900,000

Advances 452,970,663 440,936,152 365,872,335 329,277,981 313,395,901

Employees 13,211 14,123 14,552 14,572 16,314

Branches 1,494 1,508 1,489 1,437 1,425

4 Net Income 9,487,952 8,445,251 9,237,015 9,666,878 6,168,262

UNITED BANK LIMITED Interest Income 33,172,200 28,794,188 24,799,314 21,367,293 14,531,307 N-I income 12,320,490 10,920,935 9,607,667 7,285,741 5,359,097

Assets 2009 2008 2007 2006 2005 620,707,389 620,240,530 546,636,506 435,889,697 358,056,146

Deposits 503,831,672 492,267,898 411,475,128 343,804,830 296,499,113

Capital 11,128,907 10,117,188 8,093,750 6,475,000 5,180,000

Advances 371,008,406 367,139,346 310,927,791 253,549,063 211,675,344

Employees 14,254 15,233 15,054 15,502 13,570

Branches 1,120 1,119 1,078 1,044 1,043

5 Net Income 15,495,000 15,374,600 15,266,000

MUSLIM COMMERCIAL BANK LIMITED Interest Income 35,774,544 28,483,084 23,921,000 N-I income 5,643,000 5,791,440 6,448,000

Assets 2009 2008 2007 509,224,000 443,615,904 410,486,000

Deposits 367,605,000 330,181,624 292,098,000

Capital 6,911,000 6,282,768 6,282,768

Advances 269,722,000 272,847,000 229,733,000

Employees 9,397 10,160 9,721

Branches 1,081 1,060 1,026

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9,011 9,377 994 952 12,142,000 8,922,000 21,253,000 14,975,000 4,991,000 5,754,000 5,463,000 4,265,000 206,848,000 188,140,000

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2006 2005 342,108,000 298,777,000 257,462,000 229,342,000

6 Net Income -1,703,109 -1,010,559 -309,044 8,682 3,788

ATLASBANK Interest Income 198,602 554,614 44,031 129,500 137,849 N-I income 49,168 245,152 346,786 96,588 10,802

Assets 2009 2008 2007 2006 2005 30,869,506 28,967,027 22,984,261 17,020,586 7,951,719

Deposits 26,173,680 18,646,412 15,322,671 8,842,946 2,186,005

Capital 5,001,466 5,001,466 5,001,466 3,125,916 1,537,000

Advances 19,219,928 20,549,869 9,242,511 7,833,786 799,411

Employees 1,085 1,471 781 247 152

Branches 40 40 25 20 11

7 Net Income 18,099,042 15,681,084 19,405,165 17,022,346 12,709,444

NATIONAL BANK OF PAKISTAN Interest Income 38,676,505 37,274,014 33,815,295 30,153,716 23,311,967 N-I income 19,109,333 16,683,476 13,940,996 12,162,892 9,424,625

Assets 2009 2008 2007 2006 2005 944,232,762 820,077,201 764,608,790 635,132,711 577,719,114

Deposits 726,513,013 625,349,269 591,817,052 501,872,243 463,426,602

Capital 10,763,702 8,969,751 8,154,319 7,090,712 5,908,927

Advances 475,338,439 413,076,390 340,369,649 316,110,406 268,838,779

Employees 17,296 16,015 16,572 14,176 13,824

Branches 1,287 1,276 1,261 1,242 1,226

8 Net Income 897,035 1,301,000 3,130,000 1,763,000 1,702,000

BANK ALFALAH LIMITED Interest Income 10,907,132 10,472,283 9,162,908 5,958,584 5,041,819 N-I income 5,182,253 4,822,924 6,038,466 3,224,639 2,268,533

Assets 2009 2008 2007 2006 2005 389,070,055 348,991,000 328,895,000 275,685,000 248,314,000

Deposits 324,759,752 300,733,000 273,174,000 239,509,000 222,345,000

Capital 13,491,563 7,995,000 6,500,000 5,000,000 3,000,000

Advances 188,042,000 191,790,000 171,199,000 149,999,000 118,864,000

Employees 7,462 7,584 7,371 6,543 5,218

Branches 253 226 191 166 128

9 Net Income 1,200,159 1,114,952 2,272,000 2,817,000 3,069,000

FAYSAL BANK LIMITED Interest Income 4,989,990 4,949,377 4,151,389 3,638,791 3,425,428 N-I income 2,813,065 2,310,593 3,441,145 2,752,597 2,914,351

Assets 2009 2008 2007 2006 2005 180,865,000 138,241,000 141,277,000 115,470,000 110,281,000

Deposits 123,655,000 102,777,000 102,067,000 74,414,000 74,737,000

Capital 6,090,911 5,296,445 5,296,445 4,237,157 4,237,157

Advances 91,346,000 83,512,000 87,346,000 74,469,000 62,324,000

Employees 2,042 1,929 1,759 1,463 1,068

Branches 133 129 105 75 56

10

KASB BANK Ltd

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Branches 100 73 51 35 35 Net Income -4,227,748 -972,969 197,693 137,347 -273,034 Interest Income -428,764 412,960 631,963 361,302 409,280 N-I income 555,032 615,591 821,479 592,947 205,624

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

Assets 2009 2008 2007 2006 2005 59,223,058 51,799,098 40,890,572 26,538,735 19,102,987 Deposits 43,899,695 35,087,477 33,131,773 21,275,570 14,828,110 Capital 9,508,617 4,014,890 3,106,978 2,292,707 2,014,707 Advances 29,498,752 32,240,196 25,143,153 14,112,718 10,739,337

Employees 1,656 1,802 1,320 1,064 815

2) Efficiency score of DEA model at stage-1 2009 Inputs Capital(X1) Assets(X2) Employees(X3) Branches(X4) Outputs Advances(Y1) Deposits(Y2)

Input-Oriented CRS DMU No. DMU Name

Sum of

lambdas RTS Efficiency 1 B AF 1.00000 1.000 Constant 2 UBL 1.00000 1.000 Constant 3 NBP 1.00000 1.000 Constant 4 KASB 0.88202 0.966 Increasing 5 HBL 1.00000 1.000 Constant 6 ABL 0.98138 0.688 Increasing 7 MCB 0.95530 0.654 Increasing 8 FBL 1.00000 1.000 Constant 9 ACBL 1.00000 1.000 Constant 10 ATB 1.00000 1.000 Constant 3) Efficiency score of DEA model at stage-1 2008 Outputs Advances(Y1) Deposits(Y2)

Optimal Lambdas with Benchmarks 1.000 1.000 1.000 0.054 1.000 0.491 0.321 1.000 1.000 1.000

B AF UBL NBP B AF HBL UBL UBL FBL ACBL ATB

Inputs Capital(X1) Assets(X2) Employees(X3) Branches(X4)

Input-Oriented CRS DMU No. DMU Name Efficiency

Sum of lambdas 1.000 1.000 1.000 1.000 1.000 1.000 RTS Constant Constant Constant Constant Constant Constant

1 2 3 4 5 6

UBL NBP B AF HBL ABL MCB

1.00000 1.00000 1.00000 1.00000 1.00000 1.00000

Optimal Lambdas with Benchmarks 1.000 1.000 1.000 1.000 1.000 1.000

UBL NBP B AF HBL ABL MCB

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7 FBL 1.00000 1.000 Constant 8 ATB 1.00000 1.000 Constant 9 ACBL 1.00000 1.000 Constant 10 KASB 0.96823 0.779 Increasing 4) Efficiency score of DEA model at stage-1 2007 Inputs Capital(X1) Assets(X2) Employees(X3) Branches(X4) Outputs Advances(Y1) Deposits(Y2)

Input-Oriented CRS DMU No. DMU Name

Sum of

lambdas RTS Efficiency 1 NBP 1.00000 1.000 Constant 2 UBL 1.00000 1.000 Constant 3 HBL 1.00000 1.000 Constant 4 B AF 1.00000 1.000 Constant 5 MCB 1.00000 1.000 Constant 6 ABL 1.00000 1.000 Constant 7 FBL 1.00000 1.000 Constant 8 ATB 0.80264 0.056 Increasing 9 KASB 1.00000 1.000 Constant 10 ACBL 1.00000 1.000 Constant 5) Efficiency score of DEA model at stage-1 2006 Outputs Advances(Y1) Deposits(Y2)

Optimal Lambdas with Benchmarks 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.056 1.000 1.000

NBP UBL HBL B AF MCB ABL FBL B AF KASB ACBL

Inputs Capital(X1) Assets(X2) Employees(X3) Branches(X4)

Input-Oriented CRS DMU No. DMU Name Efficiency

Sum of lambdas 1.000 1.000 1.000 1.000 1.000 0.837 1.000 0.101 0.088 1.000 RTS Constant Constant Constant Constant Constant Increasing Constant Increasing Increasing Constant

1 2 3 4 5 6 7 8 9 10

NBP HBL UBL MCB B AF ABL FBL ATB KASB ACBL

1.00000 1.00000 1.00000 1.00000 1.00000 0.99811 1.00000 0.76203 0.95257 1.00000

Optimal Lambdas with Benchmarks 1.000 1.000 1.000 1.000 1.000 0.315 1.000 0.008 0.017 1.000

NBP HBL UBL MCB B AF MCB FBL B AF MCB ACBL

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6) Efficiency score of DEA model at stage-1 2005 Inputs Capital(X1) Assets(X2) Employees(X3) Branches(X4) Outputs Advances(Y1) Deposits(Y2)

Input-Oriented CRS DMU No. DMU Name Efficiency

Sum of

lambdas RTS 1 HBL 1.00000 1.000 Constant 2 NBP 1.00000 1.000 Constant 3 UBL 0.96986 1.361 Decreasing 4 ABL 0.97140 0.744 Increasing 5 MCB 1.00000 1.000 Constant 6 FBL 1.00000 1.000 Constant 7 B AF 1.00000 1.000 Constant 8 KASB 0.95650 0.109 Increasing 9 ATB 0.28924 0.019 Increasing 10 ACBL 1.00000 1.000 Constant 7) Efficiency score of DEA model at stage-2 2009 Outputs Net Income(Y1) Interest Income(Y2) Non-Int income(Y3)
InputOriented CRS

Optimal Lambdas with Benchmarks 1.000 1.000 0.974 0.514 1.000 1.000 1.000 0.030 0.012 1.000

HBL NBP MCB MCB MCB FBL B AF MCB FBL ACBL

Inputs Advances(X1) Deposits(X2)

Sum of lambdas 1.000 1.165 1.000 1.000 0.531 0.283 0.245 0.147 0.029 0.006 RTS Constant Decreasing Constant Constant Increasing Increasing Increasing Increasing Increasing Increasing

DMU No.

DMU Name

Efficiency

1 2 3 4 5 6 7 8 9 10

NBP HBL UBL MCB ABL B AF ACBL FBL KASB ATB

1.00000 0.84833 1.00000 1.00000 0.80427 0.69734 0.65625 0.86490 0.48068 0.09368

Optimal Lambdas with Benchmarks 1.000 0.340 1.000 1.000 0.106 0.266 0.087 0.147 0.029 0.000

NBP NBP UBL MCB NBP NBP NBP NBP NBP NBP

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8) Efficiency score of DEA model at stage-2 2008 Inputs Advances(X1) Deposits(X2) Outputs Net Income(Y1) Interest Income(Y2) Non-Int income(Y3)
InputOriented CRS DMU No. DMU Name

Sum of

lambdas RTS Efficiency 1 HBL 0.85211 1.162 Decreasing 2 NBP 1.00000 1.000 Constant 3 UBL 0.89652 0.839 Increasing 4 MCB 1.00000 1.000 Constant 5 ABL 0.66785 0.448 Increasing 6 B AF 0.62263 0.289 Increasing 7 ACBL 0.67867 0.233 Increasing 8 FBL 0.84268 0.138 Increasing 9 KASB 0.65762 0.037 Increasing 10 ATB 0.49550 0.015 Increasing 9) Efficiency score of DEA model at stage-2 2007 Outputs Net Income(Y1) Interest Income(Y2) Non-Int income(Y3)
InputOriented CRS

Optimal Lambdas with Benchmarks 0.418 1.000 0.556 1.000 0.143 0.289 0.124 0.138 0.037 0.015

NBP NBP NBP MCB NBP NBP NBP NBP NBP NBP

Inputs Advances(X1) Deposits(X2)

Sum of lambdas 1.174 1.000 1.881 1.000 1.232 0.390 1.000 1.000 0.212 0.076 RTS Decreasing Constant Decreasing Constant Decreasing Increasing Constant Constant Increasing Increasing

DMU No.

DMU Name

Efficiency

1 2 3 4 5 6 7 8 9 10

HBL NBP UBL MCB B AF ABL ACBL FBL KASB ATB

0.83627 1.00000 0.89602 1.00000 0.73062 0.64302 1.00000 1.00000 0.75413 0.76146

Optimal Lambdas with Benchmarks 0.327 1.000 0.776 1.000 0.044 0.189 1.000 1.000 0.081 0.076

NBP NBP MCB MCB NBP NBP ACBL FBL ACBL ACBL

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10) Efficiency score of DEA model at stage-2 2006 Inputs Advances(X1) Deposits(X2) Outputs Net Income(Y1) Interest Income(Y2) Non-Int income(Y3)
InputOriented CRS DMU No. DMU Name

Sum of

lambdas RTS Efficiency 1 HBL 0.91897 1.325 Decreasing 2 NBP 1.00000 1.000 Constant 3 UBL 0.90685 1.201 Decreasing 4 MCB 1.00000 1.000 Constant 5 B AF 0.54283 2.012 Decreasing 6 ABL 0.70754 0.490 Increasing 7 ACBL 0.69324 0.197 Increasing 8 FBL 1.00000 1.000 Constant 9 KASB 1.00000 1.000 Constant 10 ATB 0.32623 0.051 Increasing 11) Efficiency score of DEA model at stage-2 2005 Outputs Net Income(Y1) Interest Income(Y2) Non-Int income(Y3)
InputOriented CRS

Optimal Lambdas with Benchmarks 0.262 1.000 0.301 1.000 0.176 0.000 0.161 1.000 1.000 0.001

NBP NBP NBP MCB NBP NBP NBP FBL KASB NBP

Inputs Advances(X1) Deposits(X2)

Sum of lambdas 38.528 1.000 27.038 1.000 19.689 14.625 6.327 1.000 0.832 1.000 RTS Decreasing Constant Decreasing Constant Decreasing Decreasing Decreasing Constant Increasing Constant

DMU No.

DMU Name

Efficiency

1 2 3 4 5 6 7 8 9 10

HBL NBP UBL MCB B AF ABL ACBL FBL KASB ATB

0.89216 1.00000 0.79788 1.00000 0.49890 0.75304 0.64402 1.00000 0.50269 1.00000

Optimal Lambdas with Benchmarks 1.328 1.000 0.608 1.000 0.708 0.394 0.156 1.000 0.009 1.000

MCB NBP MCB MCB FBL MCB NBP FBL MCB ATB

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