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and effective utilization of resources is the key objective of every bank. This
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
extensively in the banking literature, as the banks have very significant role
in the economic development of a country. For the country like Bangladesh the
efficient banking system is more important. The banking industry of Bangladesh
comprises of four types of scheduled banks; these are state owned,
nationalized, specialized, private and foreign banks. In the present time total
of 57 banks are operating in Bangladesh, among these 6 are state owned, 2 are
specialized, 32 are conventional private commercial banks, 8 are Islami
Sahariah banks and the rest 9 are the foreign commercial banks.


The concern of the study is to
measure the efficiency of the two principal segments of the commercial banks 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.   














Statement of the Problem

The main problem
of the research is dealing with the efficiencies in different segments of
banks. To find out the solution to the problem, the paper will focus on two
principal segments of banks. The paper will focus on the cost and earning efficiency
of private commercial banks in Bangladesh.   


1.2 Scope of the study

For measuring the efficiency of the
banking sector of Bangladesh the study is conducting to the 22 sample banks
representing the conventional private commercial banks. For the efficiency measurement
some statistical tests have been used 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 of Bangladesh and to give some recommendations to improve their
efficiency. To do this, the specific objectives are

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

To conclude the efficiency result for
the population on the basis of sample Banks.

To find the correlation between input
output variables.


Rational of the Study

From the very early stage of
business evolvement in the history efficiency is a very significant term. In
all stage 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


1.5 Limitations of the study

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

Unavailability of data is a major

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

Data accuracy cannot be ensured as
mainly secondary data collected from Annual Reports of the sample banks,
various financial stability reports, Economic trends are used in this study.

was difficult to organize the report in a simple manner within limited time.
Time is an important limitation for the preparation of the report.

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

Literature Review

a few relevant works have been reviewed in order to understand 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.


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 evidence on
relationship between foreign ownership on bank efficiency is not
significant for the income-based model.


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
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 other hand,
private ownership has favorable impact on income efficiency,
return on assets, and non-performing loans, whereas negative impact on cost


et al. (2011), employed data envelopment analysis to estimate the relative
efficiency of 12 commercial banks of Pakistan.
The results of their study offered some very constructive managerial
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. In particular, the service-profit chain has been cast as a cascade of
efficiency benchmarking
models. Empirical results indicate that superior insights can be obtained by analyzing
operations, service quality and profitability than the information obtained
from benchmarking
studies of these three dimensions separately (Soteriou 1997).


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 Grangercausality
methods3 (Berger and De Young 1997) in a panel data framework. The results show
that subdued
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.


the profitability test as suggested by Spong et al. (1995), the main
differences between the “most efficient” and
“least efficient” bank seem to be mainly related to staff expenses. In
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. Moreover,
inefficient banks always appear to have 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.


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.
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 highlights that the relationship between
banks and the capital market is both competitive and complementary.
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. Thus, in
developing a financial system, the initial focus should be on
improving the efficiency of banks.


1998) Berger et al. (2006), found a
strong favorable efficiency effects from reforms that reduce the state
ownership of banks in China and increase the role of foreign ownership. The Big
Four National Banks4 are by far the least profit efficient,
apparently due in large part to poor revenue performance and high
nonperforming loans. The majority foreign-owned banks are also relatively
efficient. The
results of the study conducted by Mihir et al. (2009) showed that foreign banks
were slightly
more efficient than the local public and private banks, and that there was not
much of a difference
in the efficiency of public and private banks. Net worth was found to be
under-productive for efficient private and foreign banks, while it
was properly utilized by public banks. Thus, profitability
of private and foreign banks is expected to be lower than that of public banks,
especially in terms of return on net worth. Operating expenses
were found to be very under-productive for efficient private
and foreign banks.


and Inanoglu (2004) estimated the comparative
cost efficiency of Turkish banks for the period 1990-2000 using the data
envelopment analysis (DEA) method. They found that Islamic banks were more
efficient due to their asset-based financing.

(2004) compared the performance of Islamic banks and conventional commercial
banks of Bahrain with respect to (a) profitability, (b) liquidity,
and (c) capital management. A comparison of eleven financial ratios
for the period 1991-2001 found no difference in profitability and liquidity
performance between Islamic and conventional banks for that period.

and Majid (2006) investigated the comparative efficiency of foreign and
domestic banks of Malaysia during 2001-2005. They found that
banks’ scale inefficiency dominated pure technical efficiency during
period. They also found that the foreign banks had higher technical efficiency
than the domestic banks.



An observation of Chowdhury (2002)
was that the banking industry of Bangladesh is a combination of nationalized,
private and foreign banks. Many efforts have been made to explain the
performance and efficiency of these banks. For understanding the performance of
the bank requires knowledge about the profitability and relationship between
variables like, market size, bank’s risk and bank’s market size with the


In a study on Malaysian commercial
banks Mohd. Zaini Abdul Karim (2003) found that ICT has significantly increases
the cost efficiency after the legged period of one year. Some other studies on
banking market structure of Malaysia, such as Rostia Suhaimi(2006), Abdul
Ghafar Ismail (2002), found that Malaysia’s banking industry has an imperfect


Van Horne & Wachowicz (2005)
stated that for evaluating a firm’s financial condition and performance a
financial analyst need to perform “checkups” on various aspects of a firm’s
financial health. A tool frequently used these checkup is financial ratio.


Pandey (2006) stated that the
easiest way to evaluate the performance and efficiency of a firm is to compare
its present ratio with the past ratio. It gives an indicator of the direction
of change and reflects whether the firm’s financial performance has improved,
deteriorated or remained constant over time.


Small and medium sized banks from
the early 1970’s until the early 1980’s deregulation occurred were examined by
Wall (1985). He found that profitable banks have lower interest rate and their
non-interest expenses are lower than the less profitable banks. In addition the
more profitable banks have had lower cost of funds, greater use of transaction
deposits, more marketable securities and higher capital.


Gup and Walter (1989) got the
consistently profitable small banks operates basic banking with low cast funds
and high quality investment. The study took under consideration the banks from
1982 to 1987 during the deregulations. During this period there were
considerable differences between regions due to declining energy, real estate
and commodity prices. During this period high quality loan was made by high
performance banks. And these banks held proportionately more capital, invested
more in more securities and relied on lower cost funding sources compared with
the average small bank.


Chowdhury and Islam (2007) pointed
the sensitivity to the interest changes. They narrated that the deposit and
loan advances of nationalized commercial banks (NCBs) are less sensitive to the
interest changes than those of specialized banks (SBs). So, SBs should not make
abrupt change in lending or deposit by following by NCBs. If NCBs changes their
lending rate their deposit or loan and advances will be affected less than
those of SBs.  Moreover, deposits of NCBs
have higher volume and higher volatility than those of SBs. However SBs offer
higher deposit rates and charges higher lending rate than NCBs, which is why
the interest rate spread of SBs was higher than that of NCBs.


Khan (2008) narrated that bank is
evaluated based on profit and loss as the same way for other business. If the
shareholders of the bank more profit than the bank is identified more
successful. Banks can attain success if relevant risks are effectively


Mujeri & Younus (2009) stated
that the higher the higher and non interest income as a ratio of total assets
of banks, the lower the interest rate spread. Similarly market share of a
deposit of a bank, statutory reserve requirement and NSD certificate interest
affects the IRD. The analysis In terms of banks Group Shows that IRS
significantly influenced by operating cost and clasifed loan of stated owned
commercial bank and specialized banks while inflation, operating cost market
share of deposit, statutory reserve requirement and taxes are important for the
private commercial banks. On the other hand non interest income, inflation,
market share and taxes matter for the foreign commercial banks.


Another observation from the
Chowdhury and Ahmed (2009) is that all selected private commercial banks are able
to achieve a stable growth of branches, employee, deposit, loans and advances,
net income, earning per share during the period of 2002-2006. They pointed that
the prospect of private commercial banks in Bangladesh is very bright


There has been some analysis of bank efficiency in
India. For the most part, these analyses have used financial
indicators for measuring bank efficiency as in the articles by Rammohan and Roy
(2004) and Sarkar
et al. (1998). Rammohan and Roy found that public sector banks are more
efficient than private sector banks in India. In another
study, Kumbhakar and Sarkar (2003) used a cost efficiency approach for
bank efficiency and also concluded that private sector banks had higher levels
of efficiency in contrast to public sector banks in that country.

 Another group of Indian scholars
used the DEA approach in measuring bank efficiency, including Saha and
(2000), Bhattacharyya et al. (1997) and Sanjeev (2006). Bhattacharyya et al.
(1997) determined
that public sector banks were the best performing banks in India during the
late 1980s and early 1990s. Shanmugam and Das (2004)
used a stochastic frontier analysis (SFA) process for measuring technical
efficiencies of Indian commercial banks and found that a group of state banks
were more efficient than a comparable group of
foreign banks during a period from 1992-1999.

Andries and Cocris (2010) analyzed the comparative
efficiency of banks in several southern European countries
during the period of 2000-2006 using both DEA and SFA analytic processes. They
found that banks
in Romania, the Czech Republic, and Hungary all operated at relatively low
levels of technical efficiency. Samad has
done several evaluations of the Bangladesh banking system.

(2009) review of technical efficiency
using data for 2000 found the average efficiency of those banks was 69.6. Samad
(2007) also examined the comparative performance of foreign
banks verses domestic banks in Bangladesh using various
financial ratios of bank performance and found no difference in profit
performance between domestic banks and foreign banks
in the period 2000-2001. In yet another analysis, Samad (2010) estimated
technical efficiency of Grameen bank micro-financing activities in Bangladesh
as developed by Nobel Laureate, Dr. Muhammad Yunus.

(2009) has also previously examined the TE of Bangladesh banking industry, but
the current analysis is
different from the previous studies in several ways. First, there was no
comparison in the previous study. Second, unlike the 2009 study,
this study estimates loan and deposit for technical efficiencies instead of
of the previous study. Samad (2013) investigated the efficiency of Islamic
banks using the time varying Stochastic Frontier function
on the Islamic banks of 16 countries. Mean efficiencies between the
global financial crisis and the post global crisis were estimated at 39 and 38
percent respectively and the difference was not
statistically significant.


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