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X-efficiency, scale economies, Technological Progress and Competition of Pakistani’s banks

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  • Qayyum, Abdul
  • Khan, Sajawal

Abstract

This study aims at investigating empirically the x-efficiency, scale economies, and technologicalprogress of commercial banks operating in Pakistan. As banking sector efficiency is consider as a precondition for macroeconomic stability, monetary policy execution, and economic growth.We also make efficiency comparisons between the domestic and foreign banks and big banks.Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts. The scale economies for small banks, especially foreign banks are higher. Results show also that market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce with out conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which an important concern of the State Bank of Pakistan SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due mergers are passed on to depositors and borrowers.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2654.

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Date of creation: 2006
Date of revision: 2006
Handle: RePEc:pra:mprapa:2654

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Keywords: x-efficiency; scale economies; technologicalprogress; Commercial Banks; Pakistan;

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  1. Tser-Yieth Chen, 2001. "An estimation of X-inefficiency in Taiwan's banks," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(3), pages 237-242.
  2. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, Elsevier, vol. 44(1), pages 1-34, January.
  3. Riccardo Lucchetti & Luca Papi & Alberto Zazzaro, 2000. "Banks' inefficiency and economic growth: a micro-macro approach," Heterogeneity and monetary policy, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica 0004, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
  4. Isik, Ihsan & Hassan, M. Kabir, 2002. "Technical, scale and allocative efficiencies of Turkish banking industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(4), pages 719-766, April.
  5. Yuengert, Andrew M., 1993. "The measurement of efficiency in life insurance: Estimates of a mixed normal-gamma error model," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 483-496, April.
  6. Aly, Hassan Y, et al, 1990. "Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 211-18, May.
  7. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(4), pages 655-672, May.
  8. C. Edward Chang & Iftekhar Hasan & William Hunter, 1998. "Efficiency of multinational banks: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(6), pages 689-696.
  9. Mohammad Hanif Akhtar, 2002. "X-efficiency Analysis of Commercial Banks in Pakistan: A Preliminary Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 41(4), pages 567-580.
  10. Andrew M. Yuengert, 1993. "The measurement of efficiency in life insurance estimates of a mixed normal-gamma error model," Research Paper 9308, Federal Reserve Bank of New York.
  11. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 2(4), pages 367-74, October.
  12. Musleh-Ud Din & Ejaz Ghani & Sarfraz K. Qureshi, 1996. "Scale and Scope Economies in Banking: A Case Study of the Agricultural Development Bank of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 35(3), pages 203-213.
  13. 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, Department of Economics, The Lahore School of Economics, vol. 10(2), pages 55-74, Jul-Dec.
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