Efficiency Dynamics and Financial Reforms: Case Study of Pakistani Banks

Abstract

Banking sector in Pakistan were facing problems of weak health and low profitability due to various factors i.e. low productivity, high intermediation cost (high cost\ndeposits), huge expenditures on establishment, over staffing, large number of loss making branches and mismanagement of funds etc. Owing to this, banking sector in Pakistan was under great deal of pressure to maintain their profitability. To overcome these issues,\nPakistan undertook financial sector reforms in early 1990s with financial support of World Bank and Japanese government under the banking sector adjustment loan (BSAL) program. \nThe main goal of these reforms was to improve the Total Factor Productivity (TFP) of financial system through separating ownership, management and strengthening the\naccountability mechanism. Using the data sets of 20 domestic commercial banks of Pakistan, this study is intended to measure the banking efficiency through Data Envelopment Analysis (DEA) Malmquist Index of Total Factor Productivity (TFP) from 1990 to 2005 to access the\nimpact of reforms on banking sector. The analysis is useful not only for policy makers but it also assess the impact of reforms on domestic commercial banks of Pakistan