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Literature Review

few related works have been reviewed in order to understand or elicit the 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.

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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 proof on
relationship between foreign ownership on bank efficiency is not important
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 contrary,
private proprietorship has positive influence on efficiency of income, return
on assets, and non-performing loans, whereas unfavorable influence on efficiency
of cost.


et al. (2011), used data envelopment analysis to estimate the relevant
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. Specially, the service-profit chain has been casted as a source of
efficiency measurement
models. Exploratory outcome shows that superior insights can be gained by analyzing
at one
time 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 Granger
causality methods 3 (Berger and De Young 1997) in a panel data framework. The outcome
show that restrained
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 focused by Spong Et Al. (1995), the core distinctions between
the most and least efficient banks seem to be highly related to the personnel expenses.
In the
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. In addition,
inefficient banks always come up with lower levels of equity/assets and higher
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 focuses that the relationship between
banks and the capital market is both competitive and supplementary. When
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. In this way, the
initial focus in a developing financial system should be on improving the efficiency
of banks.

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