Cost Efficiency of Banking Sector of Bangladesh: Evidence Using the Stochastic Frontier Analysis

Asian Journal of Empirical Research, Vol 8, Issue 6, pp 208-224, June 2018

26 Pages Posted: 4 Jun 2018 Last revised: 10 May 2019

See all articles by Hashibul Hassan

Hashibul Hassan

Jagannath University - Department of Finance; Monash University - Department of Economics

Mahmudul Hassan

Jagannath University - Department of Finance, Students

Date Written: May 22, 2018

Abstract

Banking industry dominates the financial sector of Bangladesh with an approximate share of 74% of the total intermediation. In recent years, this industry is at high risk due to supervision gaps, overcapacity and market distortions. Therefore, measuring the efficiency of the banking industry is critically important to identify poor banks and bring stability by concentrating on their performance. This study employs single stage stochastic frontier analysis (SFA) to measure the cost efficiency in the Bangladeshi banking sector during the 2011-2015 period. Five different stochastic models are used across the 35 sample banks. Evidence suggests that the mean cost efficiency found in the Bangladeshi banking sector is 88.50%. The mean efficiency is lower among the state-owned banks than conventional (private) commercial banks and Islamic Sariah banks. From the analysis, it seems that there is a low technological advancement in the banking sector during 2011-2015. Further, the analysis indicates that non-performing loans have a significant effect in reducing the overall cost efficiency among the banks.

Keywords: Intermediation Approach; Production Approach; Stochastic Frontier Analysis (SFA); Trans-Log Cost Function

JEL Classification: D24; G21; N25

Suggested Citation

Hassan, Md. Hashibul and Hassan, Mahmudul, Cost Efficiency of Banking Sector of Bangladesh: Evidence Using the Stochastic Frontier Analysis (May 22, 2018). Asian Journal of Empirical Research, Vol 8, Issue 6, pp 208-224, June 2018, Available at SSRN: https://ssrn.com/abstract=3183196 or http://dx.doi.org/10.2139/ssrn.3183196

Md. Hashibul Hassan (Contact Author)

Jagannath University - Department of Finance ( email )

Dhaka
Bangladesh

HOME PAGE: http://www.jnu.ac.bd

Monash University - Department of Economics ( email )

Australia

Mahmudul Hassan

Jagannath University - Department of Finance, Students ( email )

Dhaka
Bangladesh

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