How Efficient are Commercial Banks in Bangladesh? Evidence from the Stochastic Frontier Approach


Md. Fazle Fattah Hossain

Md. Abdul Wadud

Journal: Bangladesh Journal of Political Economy

(pp: 231-242) | Doi No: http:/



The banking sector in Bangladesh  includes  various  sorts  of  banks;  there are state-owned and private commercial banks, conventional and Islamic commercial banks and different generation banks.  All  kinds of  banks start the journey to contribute to the banking sector and hence economic growth    in Bangladesh through, among others, mobilising deposits and providing loans. This paper aims to evaluate the technical efficiency of a sample of first-generation and second-generation commercial banks. The sample of first general banks includes Janata bank limited, Rupali Bank Limited and Islami Bank Bangladesh Limited, while the second-generation banks consist of Dutch Bangla Bank Limited and Jamuna Bank Limited.

We apply the stochastic frontier approach with the Cobb-Douglas  frontier model specification. We use secondary data from 1996 to 2017 for the first-generation banks and 2002 to 2017 for the second-generation banks. We use operating income, net profit, deposit, and loans & advance as dependent variables and labour cost, occupancy cost, cost of material and other expenses as independent in the stochastic frontier model. We estimate four stochastic frontier models with four dependent variables separately, applying the maximum likelihood estimation technique. We also estimate these frontier models with both the specification of the half-normal as well as the truncated normal distributional assumptions for the inefficiency effects component and choose the specification to apply the generalised likelihood ratio test.

Efficiency results show that Dutch Bangla Bank Limited and Jamuna Bank Limited, as second-generation banks, are 73 and 55 per cent  technically 

efficient, respectively, in terms of earning a profit. In contrast, Islami Bank Bangladesh Limited, Janata Bank Limited and Rupali Bank Limited, as first- generation banks, are, on average, 59, 33 and 46 per cent efficient in achieving profit targets. It implies that state-owned first-generation banks are less efficient than other banks. Results also indicate that first general banks are, on average, 96 and 89 per cent technical efficient in mobilising deposit and supply loans and advances, while second-generation banks are 83 and 84 per cent technical efficient, respectively, on an average. It predicts that first-generation banks are more efficient than second-generation banks in mobilising deposits and providing loans & advances. Results imply that given the technology, there are scopes for improving efficiencies, especially in realising more profit, and hence appropriate policy formulations are required.



Md. Anishur Rahman


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