Technical, allocative and cost efficiency of private commercial banks in Bangladesh

Md. Rezwan Islam Khan and Rumana Haque

Asian Journal of Economics and Banking, 2025, vol. 10, issue 1, 96-121

Abstract: PurposeConsidering the fact that an efficient bank is able to allocate its resources effectively, reduce its operating costs and maximize profitability, this study investigates the technical, allocative, and cost efficiency (TE, AE, CE) of private commercial banks (PCBs) in Bangladesh from 2017 to 2023 to gain insight into the current condition of Bangladesh’s private banking industry and provide policy recommendations for managers. The paper also determines a few determinants of banking efficiency. Due to the unavailability of data, 39 banks out of 43 private commercial banks were observed.Design/methodology/approachThe study used the data envelopment analysis (DEA) and the modern network DEA (NDEA) as the research tools. The input variables include total deposits, fixed assets, and personnel expenses with their prices, while the output variables consist of total loans and off-balance sheet items for DEA. Total deposits were considered as an intermediary product in NDEA. In addition, a Bayesian Tobit Regression Analysis is conducted to define the determinants of banking efficiency in conjunction with Tobit Censored Regression Analysis. The predictors selected for the analysis are bank size, share of loans, profitability, cost management ability, and credit risk.FindingsThe DEA results suggest that Bangladesh’s PCBs performed well in terms of TE, AE, and CE during the study period, averaging 91%, 94%, and 86%. The NDEA model, on the other hand, shows the average scores of 54%, 73%, and 38%, respectively. The determinants of TE are the bank size, share of loans, and cost management ability, while only the first two act as determinants of CE. There is no evidence that these variables act as determinants of AE. The findings have some limitations due to issues with the model’s goodness of fit.Originality/valueBy comparing the DEA and NDEA scores, this study contributes to the body of research by looking at how efficient Bangladesh’s private commercial banking sector is as a whole while also defining the determinants of efficiency. This study differs from other studies as it applies frequentist and non-frequentist statistical methods for identifying banking efficiency determinants.

Keywords: Technical efficiency; Allocative efficiency; Cost efficiency; Data envelopment analysis; Tobit regression; Bayesian statistics (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajebpp:ajeb-10-2024-0117

DOI: 10.1108/AJEB-10-2024-0117

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