Theses and Dissertations

Student Number

03120

Degree

Master of Science in Economics

Department

Department of Economics

Date of Award

Spring 2017

Advisor

Dr. Naeem uz Zafar

Committee Member 1

Dr. Naeem uz Zafar, Institute of Business Administration, Karachi

Project Type

Thesis

Access Type

Restricted Access

Document Version

Final

Pages

x, 41

Subjects

Economics, Banks

Abstract

Since the 1990s, Pakistan's banking sector has undergone measured and noteworthy reforms. The purpose of these reforms was to build a reliable and competitive banking system to improve efficiency and dependability. To assess and evaluate cost efficiency of Pakistani banks, this research uses parametric stochastic frontier analysis (SFA). The study is conducted for the period of 1998 to 2010; a period immediately following the enactment of the financial reforms in the banking sector. And in this study we compare a number of specifications of SFA model to establish the desired frontier efficiency model. x The study shows that the one stage Hicks-neutral SFA model performs better than any other specifications tested. This SFA specification consisted of inPfts, outputs, control variables and generalized banking characteristics in the cost. Based on our SFA model, the cost efficiency of Pakistani banks is averaged to be 80%, over the period from 1998 until 2010. Over the same period, the structural reforms had a positive impact on Pakistani banking efficiency. Our findings show that Islamic banks and domestic private banks are more efficient than state-owned banks. Similar results were reported by Patti and Hardy (2005); Rizvi (2001), Matthews (2010) and Burki and Ahmad (2010). Furthermore, analysis suggests that differences in cost efficiency of Islamic banks in comparison to conventional banks is not statistically significant. In order to enhance Pakistani banking efficiency further, the State Bank of Pakistan should initiate better risk management policies. Furthermore, enhanced corporate governance and competition among banks could lead to an increased efficiency.

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