Geo436.com blog: Pak banks improve in competitiveness: Kent

Geo 436 ISLAMABAD: Pakistani banks in public sector have higher cost-inefficiency compared to foreign banks operating in the country, said Professor Kent Matthews of Cardiff University, UK, here.

Professor Kent, who delivered a lecture on ”Banking efficiency in emerging market economies” at National Institute of Banking and Finance (NIBAF) here on Saturday at 17th lecture of Zahid Memorial Lecture series, said that the banking sector in the emerging economies is facing stronger competition due to globalisation in financial system.

However, he added that after reforms in banking sector, efficiency of banks had improved and concentration was reduced in recent years, which was because of competitiveness. He said that human capital and development, along with incentives, is very critical to motivate management to perform best. The foreign banks were the most efficient in terms of cost in Pakistan whereas the public sector banks have cost technical and allocative inefficiencies.

The reasons for high cost-inefficiency of local banks, he said, was because of their large network of branches, even in remote areas. But there is a need to introduce improved management and increase motivation levels to reduce cost, and increase profits in the banking sector.

The performance of Islamic banks surged during the earlier years and this was due to the fact that only two banks were operative till 2005. The index goes down because a couple of new entrants started their operations in 2005-06. Thus, it was seen that the performance of Islamic banks had been most consistent after the year 2006. Moreover, the efficiency scores of Islamic banks are getting closer to that of the foreign banks.

It is also evident that the consolidation in Pakistani banking sector due to the raise in minimum paid up capital requirement has led to stable performance of these banks. He said that he used input and output variables in estimating bank efficiency in Pakistan by applying five models. These, in turn, are decomposed into its technical inefficiency and allocative inefficiency components.

The results suggested that there was sufficient independent variation in each bank category type to separate the distribution of technical efficiency from the rest of the population. Also, the only bank category that had a distribution of allocative inefficiency that could be separated from the rest was foreign banks. However, these statistics are only indicative as the means and distribution could be signalling other relevant but unidentified factors, he said.

Rof Kent said: “Bank efficiency is clearly a topic worthy of consideration and it is particularly worthy of study in the case of emerging markets. In economies where capital and debt markets are as yet undeveloped, the principal conduit for economy wide investment and saving is through the banking system. The efficiency of the banks is an indicator of the efficiency of financial intermediation. Furthermore, the banking sector of the emerging economies is facing stronger competition due to the globalisation of the financial system.

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.”