Cost Efficiency in South Asian Banking: The Impact of Bank Size, State Ownership and Stock Exchange Listings^*

Abstract

This study examines the cost efficiency performance of 111 commercial banks in Bangladesh, India, Pakistan and Sri Lanka over 1997-2004. The primary focus is to assess whether bank size, state ownership and stock exchange listing have significant effects on South Asian banks' efficiency performance. To this end, a translog-form composite-error cost efficiency model, which allows for exogenous environmental influences, is estimated. The results indicate that the overall efficiency of South Asian banks declined over 1997-2004. Larger banks and banks with widespread ownership through stock exchange listings were found to be relatively more cost efficient. In contrast, state-owned banks were less efficient.

Cost and profit efficiency of conventional and Islamic banks in GCC countries

“…The degree of monetization is positively associated with profits and is not significantly related to costs. This finding differs significantly from the study of Perera et al (2007) which found a significant positive relationship between the ratio of broad money supply to GDP and total costs. Regarding other elements of macroeconomic variables, our findings on the effect of the density of demand is consistent with those of Carvallo and Kasman (2005) who report a negative impact of this variable on total costs.…”

“…In line with the recent developments in the literature (Fries and Taci 2005; Perera et al 2007;Mamatzakis et al 2008) and in order to capture heterogeneity across countries, the cost function in this study is extended to accommodate country-specific variables and thus appears as follows:…”

“…An overview of research shows ambiguous results. According to Perera et al (2007), but also Berger et al (1993) and Miller and Noulas (1996), larger banks are more cost efficient than smaller banks, because large size allows wider penetration of markets and increase in revenue at a relatively less cost. However, some recent studies Dacanay 2007) report a significant negative relationship between bank size and efficiency.…”

“…Based on previous studies (Fries and Taci 2005;Carvallo and Kasman 2005;Perera et al 2007), these variables are categorized in two groups and include macroeconomic variables and a measure of the structure of the banking industry. The first group comprises five variables: per capita GDP, Degree of monetization, density of demand, annual average of inflation and density of population.…”

“…First, we estimate a stochastic cost and profit frontiers using a specific functional form (standard translog function). To follow Perera et al (2007) and Mamatzakis et al (2008), country-level variables are incorporated in the common cost and profit frontiers to account for variation in banking technologies that may be related to macro-economics conditions and to structural and institutional features of a country. In this research, we use the maximum likelihood procedure of Battese and Coelli (1995) that permits in a single step to estimate the parameters of the cost and profit frontiers and to investigate the determinants of bank efficiency.…”