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Scale and Scope Economies in Banking: A Case Study of the Agricultural Development Bank of Pakistan

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Author Info

  • Musleh-Ud Din

    (Pakistan Institute of Development Economics, Islamabad.)

  • Ejaz Ghani

    (Pakistan Institute of Development Economics, Islamabad.)

  • Sarfraz K. Qureshi

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

This paper examines the scale and scope efficiency of the Agricultural Development Bank of Pakistan. Using the production approach to measuring bank outputs and costs, a translog cost function is estimated to provide an assessment of the bank’s scale and scope efficiency, and to quantify the extent to which its production costs are sensitive to size and output mix. Our results show that the bank enjoys both overall and product-specific economies of scale and, therefore, there exists scope for the bank to expand its operations at declining average cost. We show that even though bank branches in all size categories enjoy economies of scale, the extent of such economies is larger for branches operating at a smaller scale of production. This implies that as the bank branches grow larger in size in terms of both loan and deposit accounts, they move closer to attaining constant returns to scale. It is also shown that the marginal costs of servicing both loan and deposit accounts decline as bank branches grow larger in size in terms of either the number of loans or the number of deposits. This confirms that branches operating at a larger scale of production have attained greater cost efficiency in terms of servicing the loan and deposit accounts. As regards economies of scope, our results show that the bank’s production technology is characterised by cost complementarity, which gives rise to cost savings through the joint production of loan and deposit accounts.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 35 (1996)
Issue (Month): 3 ()
Pages: 203-213

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Handle: RePEc:pid:journl:v:35:y:1996:i:3:p:203-213

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Cited by:
  1. Qayyum, Abdul & Khan, Sajawal, 2006. "X-efficiency, scale economies, Technological Progress and Competition of Pakistani’s banks," MPRA Paper 2654, University Library of Munich, Germany, revised 2006.
  2. Ahmad, Usman, 2011. "Financial Reforms and Banking Efficiency: Case of Pakistan," MPRA Paper 34220, University Library of Munich, Germany.
  3. Abdul Qayyum & Sajawal Khan, 2007. "X-efficiency, Scale Economies, Technological Progress and Competition: A Case of Banking Sector in Pakistan," PIDE-Working Papers 2007:23, Pakistan Institute of Development Economics.
  4. Adiqa Kiani, 2005. "A Comparison of Domestic Vs Foreign Banks Using Stochastic Frontier Approach," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(2), pages 55-74, Jul-Dec.
  5. Abdul Qayyum & Sajawal Khan, 2006. "X-efficiency, Scale Economies, Technological Progress, and Competition: The Banking Sector in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 733-748.

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