Bank governance changes in Pakistan: Is there a performance effect?

This paper investigates the performance effects of bank governance reforms in Pakistan where banking industry has completed two decades of transition from dominance of state-owned banks to a system where foreign and private banks compete freely with state-owned banks. We employ the stochastic frontier and inefficiency effects model on panel data from 1991 to 2005 and control for inter-bank heterogeneity in bank cost structures. We find that private banks demonstrate highest level of cost efficiency, followed by foreign, and then state-owned banks. Privatized and restructured banks suffer from efficiency losses in years following privatization/restructuring, but improve performance once they adjust. Although small and weak banks are selected for M&A, but following ownership change they increase technical efficiency. If present trends continue the reformed banks are likely to hold on to efficiency gains in the near future. The winners from the reforms are privatized banks and private banks selected for M&A who exploit new profit making opportunities.