Viable policies for cost efficiency in banking sector stressed

Professor Kent Matthews, Sir Julian Hodge Professor of Banking and Finance, Cardiff University UK have urged formulation of policies promoting convergence of cost efficiency within Pakistani banks. He, however, said that improved competitiveness of Pakistan's banking industry has resulted in higher level of cost efficiency thereby increasing the effectiveness of financial intermediation.
Delivering Zahid Hussain Memorial lecture on "Banking Efficiency in Emerging Market Economics" at National Institute of Banking and Finance (NIBAF) in Islamabad, Professor Matthews said that the efficiency of the banks is an indicator of the efficiency of financial intermediation. The banking sector of the emerging economies is facing stronger competition due to the globalization of the financial system," he said and added that while the trend in deregulation and global competition will be muted for the next few years as a result of the financial crisis, the pace will pick up once the world economy is stabilised.
The lecture, organised by the State Bank of Pakistan, is the 17th such event held as a part of Zahid Hussain Memorial Lecture Series instituted in 1973. Prof Matthews in his lecture reviewed different ways to measures bank efficiency and highlighted the results of research on bank efficiency in Asian emerging economies. In particular, the lecture outlined the extent of research thus for conducted on the efficiency of banks in Pakistan and how to build and improve upon them.
He stressed that banking efficiency is a worthy topic as it only measures the overall efficacy of the banking system but also allows the evaluation of banks' intermediary role. Furthermore, knowledge on the banking efficiency helps assess the smoothness with which monetary policy transmits through the banking channel. He explained that for banks to be cost effective one needs to be able to assess their levels of technical and allocative efficiencies. He said that the concept of technical efficiency is the ability of a bank to maximise its output from the given set of inputs, for example a bank may be technically inefficient due to low levels of training, human capital and the use of interior technology. Allocative inefficiency is the inability to reallocate inputs in their optimal proportions given their respective prices, he added. Prof Matthews highlighted the necessity to formulate policies promoting convergence of cost efficiency within the Pakistani banks.
Giving his findings based data of Pakistani banking sector from year 2000 to 2009 on efficiency level in Pakistani banking sector, he said that cost inefficiency in all Pakistani banks have been estimated at 36.6%, technical inefficiency at 24.8% and allocated inefficiency at 11.8%. Cost inefficiency in publically owned banks have been estimated at 38.4%, technical inefficiency at 21.8% and allocative inefficiency at 16.6%. In private banks level of cost inefficiency amounts to 37.2%, technical inefficiency at 25.6% and allocative inefficiency at 11.6%. In foreign banks the level of cost inefficiency amounts to 18.6%%, technical inefficiency at 16.4% and allocative inefficiency at 2.2%. Inefficiency in Islamic Banks has been estimates as cost inefficiency at 29.5%, technical inefficiency at 16.5% and allocative inefficiency at 13%.
Earlier, Governor SBP Shahid H. Kardar and Justice (R) Nasir Aslam Zahid (Son of the first Governor SBP Zahid Hussain) highlighted the services rendered by Zahid Hussain for the country especially the creation and strengthening of State bank of Pakistan. Published by HT Syndication with permission from Daily Times. For any query with respect to this article or any other content requirement, please contact Editor at htsyndication@hindustantimes.com