Evaluating Total Factor Productivity Growth of Commercial Banks in Sri Lanka: An Application of Malmquist Index

Abstract

This study focuses on total factor productivity growth and its decomposition of commercial banks in Sri Lanka. For this purpose, two state banks , Bank of Ceylon and Peoples' bank and four private banks, namely, Commercial bank, Seylan bank, Hatton National Bank and Sampath were selected over the period [2009][2010][2011][2012]. By using Data envelopment analysis (DEA) total factor productivity and its components were measured in terms of efficiency change, technical efficiency change, pure efficiency change and scale change. The data related to interest income and amount of loans which were considered as two outputs and amount of deposits, total assets, number of staff and interest expenses considered as four inputs were collected from annual reports of Colombo Stock Exchange (CSE) in Sri Lanka and were analyzed on the assumption of output oriented method with constant returns to scale. It was found that, all six banks operate averagely at 87.2 percent of overall efficiency and it reveals the less performance of the banks. This less performance was achieved due to the less progress in technical change than efficiency change and the finding highlights that technical change has been the main constraint to achieve a high level of total factor productivity of commercial banks in Sri Lanka. Among the private banks, Seylan bank has the highest efficiency of 1.033 than other banks and among the state banks, Peoples' bank have the values of 0.773than Bank of Ceylon. The overall results concluded that comparatively selected private banks are more efficient than state banks in the study period in Sri Lanka.

Determinants of Banking Efficiency: Evidence from Egypt

“…In addition, literature assures this effect, where Fries and Taci (2004) and Anis and Sami (2012) indicate that foreign banks are more efficient than domestic ones. Besides, Thayaparan and Pratheepan (2014) …”

Total Factor Productivity and Efficiency Analysis on Islamic Banks in Indonesia

“…According to Thayaparan & Pratheepan (2014), Malmquist total factor productivity (TFP) calculates changes in productivity between 2 points by estimating the distance of each point associated with the same technology. The output-oriented TFP changes the productivity of the base period (t) and the next period (t + 1) defined as (Thayaparan & Pratheepan, 2014):…”

“…Thus, the change of TFP = {Change Efficiency} x {Change technology} can be divided into 2 components such as, technological change and technical efficiency change and illustrated as (Thayaparan & Pratheepan, 2014):…”

“…Changes in technical efficiency can be further divided into two, namely Pure Technical Efficiency Changes where technical efficiency is catching-up to various return-to-scale (VRS) of technology borders, and Changes in Scale Efficiency that tend to move along borders or pure technical units inefficiency in changing positions by moving away from the predicted technology. Therefore, Technical Efficiency Change is the result of pure technical efficiency change (PECH) and scale efficiency change (SECH) and can be shown as follows (Thayaparan & Pratheepan, 2014):…”