Determinants of bank's efficiency in an emerging economy: A data envelopment analysis approach

This study aims to assess the influence of internal and external factors on the Efficiency of banks in Pakistan using the Data Envelopment Analysis Approach (DEA). Bank's Efficiency is measured through DEA Model using input and output variables. The input variable includes the number of employees, number of branches, administration expenses, non-interest expenses, and loan loss provisions. In contrast, the output variable consists of net interest income, net commissions, and total other income. This study considers the internal determinants of the bank's Efficiency as corporate governance, enterprise risk management, ownership structure (state, foreign, and domestic ultimate owned banks), return on equity, financial leverage, and the size of the bank. The external determinants of the bank's Efficiency include banking structure and macroeconomic conditions. The study has used data from seventeen commercial banks over the period of 2011 to 2020. The study used the Data Envelopment Analysis Approach (DEA) and Logit and Probit Regression Model to evaluate research hypotheses. The Logit model results show that corporate governance, ultimate global ownership, and return on equity have a statistically significant and positive impact on the bank's Efficiency. Enterprise risk management and financial leverage adversely affect the bank's Efficiency. Better corporate governance can help banks to control the risk and cost of capital and enhancement the effectiveness of capital. Similarly, better risk management of banks can lead to better operational and strategic decisions in the competitive banking environment.

Automated summary

This study aims to evaluate the impact of internal and external factors on bank efficiency in Pakistan using the Data Envelopment Analysis Approach (DEA). The study finds that corporate governance, ultimate global ownership, and return on equity have a significant and positive influence on bank efficiency, while enterprise risk management and financial leverage have a negative impact. Better corporate governance and risk management can enhance the effectiveness and competitiveness of banks in the challenging banking environment.