An Empirical Investigation of Cost Efficiency in the Banking Sector of Pakistan

Muhammad Sadiq Ansari ()
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Muhammad Sadiq Ansari: State Bank of Pakistan

No 12, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This study uses the distribution free approach to estimate levels of cost efficiency of individual banks operating in Pakistan. Furthermore, these levels of efficiency are analyzed under CAMELS indicators to provide micro insights of their financial standings to justify their prevailing positions. The results show that banks are significantly distinct at different efficiency levels ranging from 87 percent to 49 percent. Technology has played a significant role in reducing the cost of banking industry. However, the banking industry is still operating under diseconomies of scale. Moreover, non-performing loans have adversely impacted the cost structure of banking industry. CAMELS ratios indicate that the most efficient banks are those with lesser amount of non-performing loans, high capital adequacy, and lesser non-interest expenditure which leads to high profitability. Overall, there is great room in the banking industry to minimize cost by eliminating the inefficiency elements.

Keywords: Cost efficiency; CAMELS indicators; financial soundness (search for similar items in EconPapers)
JEL-codes: D61 G20 G21 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-06
New Economics Papers: this item is included in nep-ban and nep-eff
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Citations: View citations in EconPapers (3)

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