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Are Saudi banks productive and efficient?

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  • Mohammad Hanif Akhtar
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    Abstract

    Purpose – The purpose of this paper is to estimate the data envelopment analysis (DEA) efficiency scores and Malmquist productivity indices of banks in Saudi Arabia, an economy that is heavily dependant on the hydrocarbon sector. Design/methodology/approach – The paper adopts the intermediation approach of banking services where financial institutions like banks are perceived to be manufacturing units, employing inputs such as interest and non-interest expenses to produce outputs such as net interest and non-interest incomes. The research methodology is comprised of the DEA and Malmquist productivity index (MPI) as a measure of change in total factor productivity, reflecting industry's performance over time. Findings – The results on MPI reflect an improvement in average productivity of banks. However, the major increase in productivity gains emerged through technological change relative to the efficiency change. The banks across the Kingdom appear to have succeeded in catching up with the best practices, even though the average scores on technical efficiency (TE) stood beyond optimal levels. Research limitations/implications – The question, whether small banks are more productive and efficient vis-à-vis large banks, remains unanswered. Likewise, to what extent the changes in oil prices and revenues affect the efficiency and productivity of banks, a second-stage regression of efficiency on oil prices and revenues along with other variables would help in calculating the degree of impact. However, these are the agenda for subsequent research. Practical implications – The banks in Saudi Arabia need to rationalize their costs to line up across the efficiency frontiers. Originality/value – The paper manages to explore the critical issues of TE and productivity changes across the banking sector in Saudi Arabia. It provides valuable insights to both the bank executives and public policy makers, who are seeking for improvements in efficiency, productivity, and competitiveness across the banking sector in the Kingdom.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Islamic and Middle Eastern Finance and Management.

    Volume (Year): 3 (2010)
    Issue (Month): 2 (June)
    Pages: 95-112

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    Handle: RePEc:eme:imefpp:v:3:y:2010:i:2:p:95-112

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    Related research

    Keywords: Banking; Banks; Data analysis; Productivity rate; Saudi Arabia;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Leigh M. Drake & Maximilian J. B. Hall & Richard Simper, 2005. "The Impact of Macroeconomic and Regulatory Factors on Bank Efficiency: A Non-Parametric Analysis of Hong Kong's Banking System," Working Papers 012005, Hong Kong Institute for Monetary Research.
    2. Vlad Manole & David A. Grigorian, 2005. "A Cross-Country Non-Parametric Analysis of Bahrain's Banking Sector," IMF Working Papers 05/117, International Monetary Fund.
    3. Subal C. Kumbhakar & Ana Lozano-Vivas, 2004. "Deregulation and Productivity: The Case of Spanish Banks," Economic Working Papers at Centro de Estudios Andaluces E2004/24, Centro de Estudios Andaluces.
    4. Isik, Ihsan & Kabir Hassan, M., 2003. "Financial deregulation and total factor productivity change: An empirical study of Turkish commercial banks," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1455-1485, August.
    5. Canhoto, Ana, 2004. "Portuguese banking: A structural model of competition in the deposits market," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 41-63.
    6. Chambers, Nurgul & Cifter, Atilla, 2006. "The Effect of Scale on Productivity of Turkish Banks in the Post-Crises Period: An Application of Data Envelopment Analysis," MPRA Paper 2487, University Library of Munich, Germany.
    7. Seiford, Lawrence M. & Thrall, Robert M., 1990. "Recent developments in DEA : The mathematical programming approach to frontier analysis," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 7-38.
    8. Athanasios Noulas, 1997. "Productivity growth in the Hellenic banking industry: state versus private banks," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 223-228.
    9. Fried, Harold O. & Knox Lovell, C. A. & Eeckaut, Philippe Vanden, 1993. "Evaluating the performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 251-265, April.
    10. Anthony N. Rezitis, 2006. "Productivity growth in the Greek banking industry: A non-parametric approach," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 119-138, May.
    11. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
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