Cost and Profit Efficiency Analysis of Commercial Banks in Bangladesh Using Stochastic Frontier Approach

Abstract

This study aims to measure the efficiency of the commercial banksin Bangladesh using the Battese and Coelli (1995) model of Stochastic Frontier Analysis (SFA) approach. This is a widely used one-stepmodel, which allows for the estimation of bank efficiencyby taking the inefficiency-effecting exogenous factors into account. Using an unbalanced panel of 287 observations from 32 banks for the period 2011-2020, we found that on average the commercial banks are 91.64% cost-efficient and 79.21% profit-efficient and both cost and profit efficiency decreased during the COVID-19 period. Furthermore, we found that-private banks are more cost and profit efficient than state-owned banks; foreign banks are more profit-efficient but less cost-efficient than domestic banks;banks established between 1991-2000 are more cost-efficient while banks established between 2001-2010 are more profit-efficient when compared to their counterparts; old banks are less profit efficient than the new banks; and finally, expectedly, large banks are found to be more profit-efficient than small banks.

Keywords: Cost Efficiency, Profit Efficiency, Stochastic Frontier Analysis, Commercial banks

Notes on Contributor
Assistant Professor, Department of Banking and Insurance, University of Dhaka
Assistant Professor, Department of Banking and Insurance, University of Dhaka