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An empirical analysis of Iran's banking performance

Author

Listed:
  • Amir Arjomandi
  • Charles Harvie
  • Abbas Valadkhani

Abstract

Purpose - The purpose of this paper is to investigate the efficiency and productivity growth of the Iranian banking industry between 2003 and 2008, encompassing pre- and post-2005-reform years. Design/methodology/approach - The study uses a new decomposition of the Hicks-Moorsteen total factor productivity index developed by O'Donnell to analyse efficiency and productivity changes in a banking context. The advantage of this approach over the popular constant-returns-to-scale Malmquist productivity index is that it is free from any assumptions concerning firms' optimising behaviour, the structure of markets, or returns to scale. The paper assumes that the production technology exhibits variable returns to scale. Findings - The banking industry's technical efficiency level – which had improved between 2003 and 2006 – deteriorated after regulatory changes were introduced in Iran. The results obtained also show that during 2006-2007, the industry's total factor productivity increased by 32 per cent. However, the industry experienced its highest negative scale efficiency rate of 38 per cent (?ROSE=0.62) and its highest negative efficiency growth of 43 per cent (?Eff=0.57) during this period. The industry also witnessed a strong drop in productivity in 2007-2008. Overall, changes in the production possibility set and scale-efficiency changes exerted dominant effects on productivity changes. Originality/value - This study is the first to use a comprehensive decomposition of the Hicks-Moorsteen TFP index to analyse efficiency and productivity changes in a banking context.

Suggested Citation

  • Amir Arjomandi & Charles Harvie & Abbas Valadkhani, 2012. "An empirical analysis of Iran's banking performance," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(4), pages 287-300, September.
  • Handle: RePEc:eme:sefpps:v:29:y:2012:i:4:p:287-300
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    Citations

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    Cited by:

    1. Thilakaweera, Bolanda Hewa & Harvie, Charles & Arjomandi, Amir, 2016. "Branch expansion and banking efficiency in Sri Lanka’s post‐conflict era," Journal of Asian Economics, Elsevier, vol. 47(C), pages 45-57.
    2. Kerstens, Kristiaan & Van de Woestyne, Ignace, 2014. "Comparing Malmquist and Hicks–Moorsteen productivity indices: Exploring the impact of unbalanced vs. balanced panel data," European Journal of Operational Research, Elsevier, vol. 233(3), pages 749-758.
    3. Arjomandi, Amir & Valadkhani, Abbas & O’Brien, Martin, 2014. "Analysing banks’ intermediation and operational performance using the Hicks–Moorsteen TFP index: The case of Iran," Research in International Business and Finance, Elsevier, vol. 30(C), pages 111-125.
    4. Moradi-Motlagh, Amir & Babacan, Alperhan, 2015. "The impact of the global financial crisis on the efficiency of Australian banks," Economic Modelling, Elsevier, vol. 46(C), pages 397-406.

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