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Qualitative Research in Financial Markets Efficiency and productivity of banking sector: A critical analysis of
Qualitative Research in Financial Markets Efficiency and productivity of banking sector: A critical analysis of

Qualitative Research in Financial Markets

Efficiency and productivity of banking sector: A critical analysis of literature and design of conceptual model Dipasha Sharma Anil K. Sharma Mukesh K. Barua

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Efficiency and productivity of banking sector

A critical analysis of literature and design of conceptual model

Dipasha Sharma, Anil K. Sharma and Mukesh K. Barua

Department of Management Studies, Indian Institute of Technology Roorkee, Roorkee, India

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 bank’s 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.

her research in the form of a junior research fellowship. Qualitative Research in Financial Markets Vol.

Qualitative Research in Financial Markets Vol. 5 No. 2, 2013 pp. 195-224 q Emerald Group Publishing Limited

1755-4179

DOI 10.1108/QRFM-10-2011-0025

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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

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Particulars

No. of papers

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 other a Total

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: a Other includes thesis, books and surveys available on internet web sites Source: Authors on calculations based on Table AI in the Appendix

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Table I. Distribution of reviewed articles from various sources

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

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Year

No. of publication

1

1994

02

2

1995

01

3

1996

01

4

1997

04

5

1998

01

6

1999

03

7

2000

01

8

2001

02

9

2002

04

10

2003

10

11

2004

12

12

2005

07

13

2006

11

14

2007

07

15

2008

06

16

2009

13

17

2010

16

18

2011

05

Total

106

198

Table II. Year wise publications Source: Based on authors own calculation of reviewed studies given
Table II.
Year wise publications
Source: Based on authors own calculation of reviewed studies given in Table AI
Year wise publications
20
15
10
Figure 1.
Year wise publication
of studies
5
0
Years
Country
No. of publications
India
24
Other
19
Europe
17
USA
12
Cross country
10
UK
5
Asia
3
Australia
3
China
3
Table III.
Country wise
publications
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
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
No. of Publications

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No. of Publications

other 20%
other
20%

Europe

18%

US UK 13% 5%
US
UK
13%
5%

Croos country

10%

China

3%

Australia

3%

Asia

3%

India

25%

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Figure 2. Country wise publications of studies

depicts the popularity of frontier techniques in developing country research. Studies on banking efficiency in developed nations like the USA, the UK, and Europe are gaining new dimensions with the new concepts of shareholder value efficiency (Fiordelisi and Molyneux, 2010a, b), market returns (Beccalli et al., 2006), etc. but in developing nations there is a lack of literature on these new paradigms of banking efficiency.

3. Literature on efficiency and productivity/development of conceptual model This section presents a conceptual flow chart of studies and break up of literature on the basis of the focus areas of efficiency and productivity change of the banking sector. Table IV represents the focus areas of reviewing studies. Most of the studies are focusing on efficiency/productivity estimation and empirical evidences on their determinants (29) (the figure given in parenthesis present number of publications in the focus area of research). New emerging areas of shareholder value and impact of stock

Focus

No. of papers

(a)

Efficiency and productivity estimation

20

(b)

Empirical evidences on determinants of efficiency and productivity

37

(c)

Efficiency, productivity: deregulation and reforms

7

(d)

Bank branch efficiency

8

(e)

Efficiency and mergers/acquisition

3

(f)

Efficiency and shareholder value, share market return

8

(g)

Efficiency and productivity: concepts and models

13

(h)

Literature survey

6

(i)

Future

4

Total

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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Figure 3. Focus area of literature

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.

4% 6% 12% 19% 7% 3% 35% 7% 7%
4%
6%
12%
19%
7%
3%
35%
7%
7%

Efficiency and productivity estimationempirical in nature. 4% 6% 12% 19% 7% 3% 35% 7% 7% (a) evidence on determinants

(a)

evidence on determinants3% 35% 7% 7% Efficiency and productivity estimation (a) (b) (c) deregulation and reforms (d) bank

(b)

(c)deregulation and reforms

deregulation and reforms

(d)bank branch efficiency

bank branch efficiency

(e)meregers/acquisition

meregers/acquisition

shareholder value/market returnbank branch efficiency (e) meregers/acquisition (f) (g) concepts and models (h) literature survey

(f)

(g)concepts and models

concepts and models

(h)literature survey

literature survey

(i)future

future

Methodology

No. of papers

Table V. Distribution of methodologies used in existing literature

Empirical

83

Conceptual

7

Descriptive

11

Exploratory cross sectional

5

Total

106

Source: Based on authors own calculation of reviewed studies given in Table AI

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On the basis of the distribution of literature and reviewed studies, we design a conceptual flow chart to represent each and every necessary step required in the study based on frontier approach of banking sector efficiency. This flowchart is designed on the basis of critical review of existing studies and studies on the literature reviews conducted by various researchers (Berger and Humphrey, 1997; Ahmad Mokhtar et al., 2006; Emrouznejad et al. , 2008; Fethi and Pasiouras, 2009). This conceptual model depicts the step by step approach of research to evaluate and assess the efficiency and productivity change of the banking sector. It also takes into account of determining variables and effects on the various corporate events. Figure 5 shows the conceptual framework of this flow chart. This flow chart clearly exhibits each and every necessary step to develop a study on efficiency and productivity estimation of the banking industry. Details and theoretical background of each step, with its empirical reliance is given in the later section of this study. The first and foremost step is to set an objective to evaluate the efficiency and productivity change of the banking industry. After framing the research question, the next step is to choose the efficiency measure to assess and productivity change (Section 3.1.1). Now the selection of appropriate frontier approach is the necessity of situation as literature has two approaches, parametric and non parametric (Section 3.1.1.1). To determine return to scale and input/output orientation is the next agenda in our framework (Sections 3.1.1.2 and 3.1.1.3). Selection of the relevant set of input-output, is the most important aspect of efficiency estimation as we define efficiency as an optimal combination of input-output. To define inputs (resources) and output, literature has production approach, intermediation approach; value added approach, and operating approach (Section 3.1.1.4). These steps of first stage analysis reveal the relative efficiency and productivity scores. These scores are further regressed in second stage analysis to explore the nature of determining variables and the impact on various corporate events. Determinants of efficiency are in general classified as bank specific variables, macroeconomic variables and regulatory variables (Section 3.1.2). Various issues on effects of efficiency are elaborated in existing literature, with the emerging concept of shareholder value efficiency, stock market return, mergers and acquisitions, bankruptcy, and bank branch efficiency (Sections 3.1.3.1-3.1.3.4). Each and every step of this flowchart is elaborated with its theoretical concepts and empirical evidences from reviewing studies and existing literature.

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3.1 Conceptual model The following section of the paper elaborates the components of Figure 5 and explains various aspects of the literature consulted for the present study.

Distribution of methodologies used in studies

Conceptual

7%

Exploratory cross Descriptive sectional 10% 5%
Exploratory cross
Descriptive
sectional
10%
5%

Empirical

78%

Figure 4. Distribution of methodologies used in the reviewed studies

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Figure 5. Conceptual framework of banking efficiency and productivity change

To Evaluate Efficiency and Productivity Change of Banking Sector: Concept, Determinants, and Effects Efficiency Measures
To Evaluate Efficiency and Productivity Change of Banking Sector: Concept, Determinants, and Effects
Efficiency Measures
Productivity
Technical efficiency
Allocative efficiency
Total Factor productivity Change
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
Value Added approach
Operating approach
Efficiency scores and Productivity Change
Effects Stock market return Mergers and bankruptcy Shareholder Value efficiency
Effects
Stock market
return
Mergers and bankruptcy
Shareholder Value efficiency
return Mergers and bankruptcy Shareholder Value efficiency Determinants Macroeconomic : GDP, Inflation Regulatory:
Determinants Macroeconomic : GDP, Inflation
Determinants
Macroeconomic
: GDP, Inflation
efficiency Determinants Macroeconomic : GDP, Inflation Regulatory: Ownership, Time, Age, Origin, Deregulation,

Regulatory: Ownership, Time, Age, Origin, Deregulation, Reforms, liberalization

Bank specific: Size, profitability, loan quality, capital adequacy, liquidity, Operating expenses.

3.1.1 Efficiency measures . Any producing unit is said to be technically efficient when it can produce the maximum amount of output using the given level of input, or it can produce given level of output using minimum amount of input. Efficiency in general is a technical term, it is a sign of efficacy of an individual bank, and benchmarking of the industry can be evaluated by peer group (banks) efficiency. Bank’s efficiency can be evaluated on the basis of two criteria:

(1) technical efficiency (Farrell, 1957); and (2) allocative or economic efficiency (Farrell, 1957; Leibenstein, 1966); allocative efficiency is further classified into two types of efficiency, one is cost efficiency (CE) and the other one is profit efficiency (PE) (Berger and Mester, 1997).

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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:

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(1)

parametric approach based on the econometric model specification; the other

(2)

one is non parametric approach based on linear programming techniques.

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

41

CE

26

PE

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% 32%
18%
32%
50%
50%

Overall Technical Efficiency OTEof efficiency measures in reviewed studies 18% 32% 50% Cost Efficiency Profit Efficiency Figure 6. Efficiency

Cost Efficiencyin reviewed studies 18% 32% 50% Overall Technical Efficiency OTE Profit Efficiency Figure 6. Efficiency measures

Profit Efficiencymeasures in reviewed studies 18% 32% 50% Overall Technical Efficiency OTE Cost Efficiency Figure 6. 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 (DMU’s) 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

No. of studies

DEA SFA DEA and SFA both Total

66

16

6

88

Table VII. Parametric and non parametric approach

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

Studies classified as Parametric and Non Parametric approaches

Both

7% SFA 18% DEA 75%
7%
SFA
18%
DEA
75%

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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.

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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

21

Intermediation approach

56

Value added approach

15

Other approach

6

Table VIII.

Approach for

input-output selection

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

Approaches for Input/output selection

Other

6% Production 22% Value added 15%
6%
Production
22%
Value added
15%

Intermediation

57%

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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.

Efficiency and

productivity

207

Most common bank specific factors are size, market share, bank’s 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

Description

Input

Labor

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 ATM’s

Capital

Purchased funds

Expenses

Other

Output

Deposits

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

Loans and advances; investments, other earning assets Fee based income Off balance sheet items Securities PAT

Source: Based on authors own calculation of reviewed studies given in Table AI

Table IX.

Specification of

input/output variables

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Table X. Variables for determinants of efficiency and productivity

Variables

Description

Bank specific variables Bank’s profitability

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

GDP, GDP per capita, GDP growth rate, per capita income, inflation, inflation ratio, fiscal deficit Stock market capitalization

Dummy for public, private, and foreign ownership Specialization activity of banks (investment banking, corporate banking) Dummy for country specific origin Dummy for region of branches (rural/urban) New/old bank Time trend Dummy for regulatory reforms in a particular year

Market share Size Liquidity Asset quality Capital adequacy Risk Macro economic variables Economic conditions

Market capitalization Regulatory variables Ownership Specialization Origin country Branch region Age Time Financial reform/policy 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

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to be shareholder value efficient when it produces maximum possible economic value added (EVA) using given level of input and outputs (Fiordelisi, 2007). This study was a cross country study of European countries and stochastic frontier technique used to calculate shareholder value efficiency. After this few studies assessed the impact of efficiency on shareholder wealth, regressing shareholder value as the dependent variable with the components of efficiency and productivity (Fiordelisi and Molyneux, 2007, 2010a, b). All of the above mentioned studies are conducted in European countries. This is an emerging area in the research on efficiency and productivity of the banking sector. To the best of our knowledge, no study on this aspect has been found in developing countries so far. 3.1.3.2 Stock return and efficiency. Studies have investigated the impact of efficiency and productivity on stock market performance and share market prices to assess the financial performance of banks in a more holistic way. Beccalli et al. (2006) investigated the relationship between percentage changes in the stock prices over the time period with percentage changes in the CE. This study explored the association of CE and stock prices in the banking industry of European countries. Sufian and Majid (2007) utilized the DEA window analysis method to investigate the relationship between X-efficiency (technical efficiency) and share prices in Singapore banking industry. Majid et al. (2008) applied three stage model to examine the empirical impact of efficiency on share prices in China. However, Panel data regression and OLS is applied in most of the studies. 3.1.3.3 Mergers and acquisition and efficiency. Efficiency and productivity change has a significant impact on corporate events and decision-making under different scenario of mergers, acquisition and bankruptcy. Krishnasamy et al. (2003) assessed

Efficiency and

productivity

209

Second stage regression techniques

No. of studies

Tobit regression

10

Panel data regression

11

Simple regression

6

Other

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

Second stage Regression techniques for determinants

Tobit Other 25% 33% Panel OLS 27% 15%
Tobit
Other
25%
33%
Panel
OLS
27%
15%

Figure 9. Second stage regression techniques

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the post mergers bank’s 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 ATM’s 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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In case of parametric and non parametric frontier analysis techniques, there is no

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(The Appendix follows overleaf.)

Among medium sized banks, no nationalized banks are efficient Public sector banks have improved their efficiency during the period of

evidence of convergence of efficiency levels towards an EU

average Controlling for the exogenous impact of problem loans is important for

online

of two DEA (input-output) models on the basis of quantity

Comparison of parametric (SFA) and non parametric (DEA) techniques Best practice co-operative banks have moved further away from other banks

across

( continued )

the smaller regional banks IT-based transactions at the branch level have a significant impact on PE

the Australian, German and

and output

efficiency

cost is higher for the

study Private bank showing higher CE than nationalized banks Banking industry experienced productivity growth due to technical progress

analysis to assess

to vary significantly

efficiency scores falls within the predicted range of

level of marketability

found capitalization,

performance Economies of scale for all banks regardless of their size

the actual approach

in approaches

intermediation

component

liquidity,

of two

scores found

costs are

lower

and from

principal

loan quality,

Downloaded by University of Ghana At 16:33 27 June 2016 (PT)

public banks than private banks

inefficiencies

relatively

Asian countries and over time

short-run cost

operating

in efficiency

of production

DEA and

banking performance

banks of acquire

unit bank; for

US banking system

of scale

controlling

Cost gap of the

High variance

Comparison

Application

Application

Supporting

Calculated

Evidences

value

Findings

After per

Large

mix

and

Methodology

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Focus

area

a

a

a

a

a a

a

a a

a

a

a a

a

a

a

a

a

a

Rezvanian and Mehdian (2002) (Singapore) Kwan (2003) (Asia)

Dash Wu (2009) (Taiwan)

Casu et al. (2004) (Europe) Molyneux and Williams (2005) (Europe)

(2005) (India)

(1997) (USA and Europe)

Debnath and Shankar (2008) (India) Saha and Ravisankar (2000) (India)

Meepadung et al. (2009) (Thailand)

Casu and Girardone (2010) (EU)

Sahoo et al. (2007) (India) Park and Weber (2006) (Korea)

Chawla (India)

Drake and Hall (2003) (Japan)

Kao and Liu (2004) (Taiwan)

and (2009)

Sathye (2003) (India)

et al. (Italy)

(USA)

and Tone

Ho and

Author (year)

Chakrabarti

Pastor (1997)

Luo (2003)

Sahoo

Bruce

Resti

S. no.

1
2 4 3

5
6

7
8

9
10

14

15
16

17 18

19

12 13

11

QRFM

5,2

218

Table AI. Comprehensive snapshot of 106 reviewed studies

Appendix

countries upholding common law traditions have a higher probability of

The scale inefficiency is the main source of OTE State-owned banks are significantly more cost efficient than foreign and private bank Larger asset size and specialization of product mix associate with higher productivity growth while higher equity to assets associate with lower productivity growth

Efficiency differences determined by country-specific factors State-owned banks are less productive than their private peers, and that

not alter the directional impact

FDI has a negative short term effect but positive long term effect on TFP change

parts banks from

privatization has increased productivity Foreign banks outperform in terms of efficiency and productivity gains

( continued )

Foreign banks have been the worst performer as compared with state

of public

sector Capital adequacy ratio and profitability show positive relation with

efficiency

and more profitable banks have higher levels of technical

CE levels

and foreign

owned and private banks Ownership explaining the efficiency differential of banks

association was found between size and productivity

association in with

than its counter

inefficiency

beta convergence

loan-intensity

on bank does

and positive

efficient

variables outputs

higher

shows

with cost

of non-traditional

Downloaded by University of Ghana At 16:33 27 June 2016 (PT)

sigma

are more

adequacy of ratio

banks banks

best performance

of environmental

Capital presence

Smaller sized

efficiency

efficiency

Inclusion

Findings

Foreign

Strong

Larger

No

Methodology

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Focus

area

b

b

b b

b

b

b

b b

b

b

b

b

b

b

b

a

Sathye (2002) (Australia) Casu and Molyneux (2003) (Europe) Nakane and Weintraub (2005) (Brazil)

et al. (2009)

(India)

Miller and Noulas (1996) (USA)

Usman et al. (2010) (Pakistan) Staub et al. (2010) (Brazil)

Mukharjee et al. (2001) (USA)

(India)

and Pasiouras

(Europe)

(2007) (Europe)

Ray and Das (2010) (India)

Gupta et al. (2008) (India)

Koutsomanoli-Filippaki (Europe) Tanna (2009) (75country)

(2010)

Sensarma (2006) (India)

(2006)

(2010)(85countries)

Gulati

Bonin et et al. al. (2005)

Ghosh

Lozano-Vivas

Author (year)

Das and and

Kumar

Barros

S. no.

24

33 34

36

25
26

27
28

29
30

20

22 23

31
32

35

21

Efficiency and

productivity

219

Table AI.

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

of China and MPI is applied to study TFP change in the banking

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

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

ownership and being listed on stock exchange have positive

period whereas Pakistan endured a reduction in efficiency

( continued )

high equity to assets and high return to average equity ratios India and Bangladesh experienced immediate and sustained growth in

and also foreign banks depicts a productivity

sectors of environmental factors on different size groups

State bank group and foreign banks are more efficient than their counterparts

and efficiency

efficient Downward trend in productivity during the study period

banks

loan large

problem than

profit efficient

are more between

study period

Downloaded by University of Ghana At 16:33 27 June 2016 (PT)

ownership,

correlation

financial impacts

efficiency,

during

Bootstrapping

on PE

technical study

Small banks

with foreign

Differential

Bank size,

Negative

Findings

regress

impact

during

sector

and

Methodology

Descriptive

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Empirical

Focus

area

b

b

b

b

b

b

b

b

b

b

b

b b

b

b

b

Mohan (2005) (India) Ataullah et al. (2004) (India and Pakistan)

Galagadera and Edirisuirya (2004) (India)

Jaffry et al. (2007) (India, Pakistan and Bangladesh)

Canhoto and Dermine (2003) (Europe)

Matthews and Zhang (2010) (China)

(2003) (USA)

Shanmugam and Das (2004) (India)

Sanyal and Shankar (2011) (India)

Al-Muharrami (2007 Arab) (GCC)

Drake et al. (2006) (Hong Kong)

(Europe)

Berger et al. (2009) (China)

Sufian (2009) (Malaysia)

Sufian (2010) (Malaysia)

Das et al. (2004) (India)

McNulty

Rossi et al. and (2005)

Author (year)

Akhigbe

S. no.

43
44

45
46

37
38

47
48

39
40

50 51

41
42

49

52

QRFM

5,2

220

Table AI.

the non-performing

does not affect

associated while presence

growth rate Application of DEA to assess bank branches Comparison of production and value added approach in bank branches Branches’ most productive scale size through the elimination of scale

( continued )

loans and other risk factors put a downward pressure

Publicly-owned Indian banks to have been the most efficient, followed

by foreign-owned banks Deregulation improves banks performance and fosters competition in the lending market Significant productivity gains driven mostly by efficiency increases

liberalization policies on bank efficiency

Benchmarking of bank branches Conceptual framework to incorporate internal service quality with

and GDP

institutions within the scope of

efficiency

in enhancing their efficiency

enhances but

for size,

and output

power efficiency

ownership,

efficiency

controlling

evaluation

positively

impact bank’s

stage input

of banking analysis

affects is bank

bank

after

in two shared

with controlling

ratio,

bank efficiency

probit regression