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An Empirical Investigation of Cost Efficiency in the Banking Sector of Pakistan

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  • Muhammad Sadiq Ansari

    (State Bank of Pakistan)

Abstract

This study uses the distribution free approach to estimate levels of cost efficiency of individual banks operating in Pakistan. These levels of efficiency are also analyzed under CAMELS indicators to provide micro insights of their financial standings to justify their prevailing positions. The results show that banks are significantly distinct at different efficiency levels ranging from 87 percent to 49 percent. Technology has played a significant role in reducing the cost of banking industry. However, the banking industry is still operating under diseconomies of scale. Moreover, non-performing loans have adversely impacted the cost structure of banking industry. CAMELS ratios indicate that the most efficient banks are those with lesser amount of non-performing loans, high capital adequacy, lesser non-interest expenditure which leads to high profitability.

Suggested Citation

  • Muhammad Sadiq Ansari, 2007. "An Empirical Investigation of Cost Efficiency in the Banking Sector of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 3, pages 209-231.
    • Handle: RePEc:sbp:journl:30
    as

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    File URL: http://www.sbp.org.pk/research/bulletin/2007/vol3num2/An-Empirical-Investigation-of-Cost.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kashif Munir & Abdul Qayyum, 2014. "Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach," Empirical Economics, Springer, vol. 46(3), pages 843-864, May.
    2. Khan, Mahmood ul Hassan & Hanif, Muhammad Nadim, 2012. "Role of Demand and Supply Shocks in Driving Inflation: A Case Study of Pakistan," MPRA Paper 48884, University Library of Munich, Germany.
    3. Mimra, Wanda & Rasch, Alexander & Waibel, Christian, 2016. "Price competition and reputation in credence goods markets: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 100(C), pages 337-352.

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    More about this item

    Keywords

    Cost Efficiency; Diseconomies of Scale; Non-Performing Loans; CAMELS Ratios; Pakistan;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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