Chapter-1 or below average efficiency. Efficiency of

Chapter-1
Introduction

Efficient
and effective utilization of resources is the key objective of every bank. This
objective
has always been
important in banking, but a number of recent events are helping to lay greater
emphasis on banking
efficiency. Increasing competition for financial services, technological
innovation, and
banking consolidation, for example, are all focusing more attention on
controlling costs in
banking, and providing services and products efficiently. Increasing
competition from non- banking
institutions as well as banking institutions, expanding into new markets, is
putting strong pressure
on banks to improve their earnings and to control costs. Efficiency is clearly
a critical factor for
remaining competitive. A number of recent statistical studies have shown that
the most efficient banks
have substantial cost and competitive advantages over those with average or
below average efficiency.

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Efficiency of banks is now a very
significant issue. Nowadays the efficiency of banks has been studied in wide range
in the banking literature, as the banks have very crucial role in the economic
development of a country. For the country like Bangladesh the banks efficiency has
a great importance. The banking industry of Bangladesh comprises of four types
of scheduled banks; these are state owned, nationalized, specialized, private
and foreign banks. In the presently total of 57 banks are in operation in
Bangladesh, among these 6 are state owned, 2 are specialized, 32 banks are
conventional PCBs, 8 are Shariah based banks and the rest 9 are the foreign commercial
banks.

 

The ultimate focus of the study is to
measure the efficiency of the two core segments of the PCBs in Bangladesh.
These are how efficiently the banks control their cost and the efficiency level
of the earnings of private commercial banks in Bangladesh. Data Envelopment
Analysis is used as the tool to measure the efficiency.   

 

 

 

 

 

 

 

 

 

 

 

 

 

1.1
Statement of the Problem

The principal
problem of the study is dealing with the efficiencies in different segments of
banks. To find the solution of the problem, the study will focus on two core
segments of banks. The study will have the focus on the cost and earning
efficiency of private commercial banks in Bangladesh.   

 

1.2 Scope of the study

To measure the efficiency of the
private commercial banks of Bangladesh the study is conducting to the 22 banks
are taken as the sample to represent the conventional private commercial banks
in Bangladesh. For measuring the efficiency some statistical tests have been conducted
according to the nature and objectives of the study. Relative financial ratios
are analyzed to measure the efficiency.

 

1.3 Objectives of the Study

The main objective of this study is
to measure and to analyze the Cost and Earning efficiency of private commercial
banks in Bangladesh and to give some recommendations to improve their
efficiency. To do this, the specific objectives are

1.     
To examine how efficient the cost and
the earnings of private commercial banks are, by examining the sample banks.

2.     
To draw conclusion for the population on
the basis of the efficiency result of sample Banks.

3.     
To find the correlation between input
output variables.

 

1.4
Rational of the Study

From the very beginning of  business evolution in the history efficiency
is a very significant term. In every step of national economy and business
efficiency is very significant.  As the
banking sector has the major and crucial role in the economy of the country and
in the advancement of the national economy banking sector has great influence,
efficiency analysis of this sector is one of the principal task. So the report
has a great significance.

 

1.5 Limitations of the study

The study of this kind is generally
encountered with some limitations.

         
i.           
Unavailability related and accurate
information and data is a big problem.

       
ii.           
From among the 40 PCBs only 21 banks are
taken as the sample for the study.

     
iii.           
Accuracy of data cannot be assured since
mainly secondary data collected from Annual Reports of the sample banks,
various financial stability reports, Economic trends are used in this study.

     
iv.           
Time was an significant constraint. It was
difficult to organize the report in the simple manner within limited time frame.

However, repeated and sincere
efforts have been given to ensure the accuracy of the data used in this study.

Chapter-2
Literature Review

Only
few related works have been reviewed in order to understand or elicit the efficiency
differences among private, public and foreign banks
in Bangladesh. Yasmeen (2006), conducted a study to find out the technical
efficiency and productivity growth of various banks in Bangladesh. She examined
four ratios: two for input and two for output by taking the data
from 2003-2007 of 35 banks. The findings also provided
some indication on the likelihood of dynamic convergence of these banks’
performance as well as the challenges that these banks faced amid
rising competition.

 

Another
work had been carried out by
Khanam & Nghiem (2004), on the efficiency of commercial banks in Bangladesh
and the data consist of only one year on 48 banks. They
considered seven ratios of which five were inputs and two were
outputs. They also found that the technical efficiency score of banks in the
sample is 84 percent
(income based model)1 and 80
percent (user-cost model)2, which is consistent with results from a parametric
approach called parametric linear programming. However, the proof on
relationship between foreign ownership on bank efficiency is not important
for the income-based model.

 

Uddin
and Suzuki (2011) had undertaken a study to investigate the performance of
commercial banks in Bangladesh after the
implementation of a significant financial reform. They considered data
from
2001-2008 of 38 banks including state owned, private owned, Islamic and foreign
banks and they had considered three inputs and two outputs to
measure the efficiency. Their findings indicated that income
efficiency and cost efficiency of sample banks have increased by 37.84 percent
and 15.28 percent in 2008 and 2001 respectively. On the contrary,
private proprietorship has positive influence on efficiency of income, return
on assets, and non-performing loans, whereas unfavorable influence on efficiency
of cost.

 

Akhtar
et al. (2011), used data envelopment analysis to estimate the relevant
efficiency of 12 commercial banks of Pakistan.
The results of their study offered some very constructive managerial
insights
into evaluation and advancing of banking operations. The estimated result shows
that 6 banks are relatively efficient when their efficiency is
measured in terms of ‘constant returns to scale’2 and 8 banks are relatively
efficient when their efficiency is measured in terms of ‘variable return to
scale’. However,
they suggested that by improving the handling of operating expenses, advances,
capital and by boosting banking investment operations, the less
efficient banks can successfully endorse resource utilization
efficiency. Several models based on Data Envelopment Analysis
(DEA)-have been developed in order to Operationalize the framework, and
their use has been illustrated using data for the branches of a commercial
Bank. Specially, the service-profit chain has been casted as a source of
efficiency measurement
models. Exploratory outcome shows that superior insights can be gained by analyzing
at one
time operations, service quality and profitability than the information
obtained from benchmarking studies of these three dimensions
separately (Soteriou 1997).

 

Fiordelisi
et al. (2010), assess the inter-temporal relationships among bank efficiency,
capital and risk for the European
commercial banking industry. They build on previous work using Granger
causality methods 3 (Berger and De Young 1997) in a panel data framework. The outcome
show that restrained
bank efficiency (cost or revenue) Granger causes risk supporting the “bad
management” and the “efficiency version of the moral hazard
“hypotheses. They found only limited evidence of relationships
between capital and risk in line with the moral hazard hypothesis. The findings
showed lower
efficiency scores (either cost or revenue) suggest greater future risks and
efficiency improvements
tend to shore up banks’ capital positions. Their findings also emphasize the
importance of
attaining long-term efficiency gains to support financial stability objectives.

 

Subsequently
the profitability test focused by Spong Et Al. (1995), the core distinctions between
the most and least efficient banks seem to be highly related to the personnel expenses.
In the
context of important technological improvements in banks’ productive processes,
the study suggested
an urgent need for greater labor market flexibility and the consequent
substitution of labor for capital. In addition,
inefficient banks always come up with lower levels of equity/assets and higher
levels
of nonperforming loans. Their finding also suggested that efficient banks are
assigning more attention and resources to loan origination,
monitoring and other credit judgment activities. Finally, the analysis
also shows that there is no clear relationship between the size of assets and
bank efficiency.

 

Yiwei
et al. (2011), found that the average profit efficiency of Eastern Europe is
close to the Central Eastern Europe region,
but average cost efficiency leaves considerable room for improvement.
They
also found that foreign owned banks are somewhat less cost efficient than
domestic private banks. It is also evident that progress in the
implementation of major economic reforms such as enterprise
restructuring and privatization are positively associated with banking
efficiency. Moreover, banking efficiency affects the development of the capital
market. This focuses that the relationship between
banks and the capital market is both competitive and supplementary. When
banks are very inefficient, an increase in banking efficiency actually results
in more borrowers migrating to the capital market. Beyond a certain
point, an increase in the efficiency of banks attracts more
borrowers to banks. Thus, the quality cut-off that determines which borrowers
go to the market and which go to the banks is non-monotonic with respect
to bank efficiency. It may not be possible to develop a
good capital market in an economy if it does not have good banks. In this way, the
initial focus in a developing financial system should be on improving the efficiency
of banks.

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