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Efficiency of Banks in Pakistan - Literature Review(Berger et al., 1993a, b) stated that cost efficiency was the main focus of the studies conducted to analyze efficiency. Afterward, bank’s efficiency literature was flaked for not taking into account profit and revenue sides of the bank’s operations. In fact, banks with higher inefficiencies and cost cannot generate higher profit as compared to efficient ones. Existing literature on efficiency of banking sector is categorized into two factions. The first faction consists of the studies that evaluate the Bank’s performance using the traditional financial ratios analysis. The second faction of studies centers on efficiency of banks and utilize the frontier analysis technique rather than applying the ratio analysis: literature that analyze the efficiency of the conventional banks; literature that analyze Islamic Banks efficiency. A few interesting studies attempted to make a comparative study between Con. and Isl. banks.
Hassan et al examined various kinds of efficiency of banking system of 11 OIC countries from the period 1990-2005 using DEA analysis. No differences were found in efficiency of the Con. and Isl. Banks. Studies conducted to calculate the efficiency of banking sector on developing countries are by Banker et al. in in South Korea, Chiu and Chen in Taiwan and Hsiao et al. in Taiwan and Heffernan in and Haw et al. in South Korea, Indonesia, Thailand, Philippines, Malaysia and Taiwan and Lozano and Pasiouras in._Sun and Chang investigated the influence of risk adopted methods on banks efficiency in developing countries of Asian region and reported that risk measures have significant positive influence on bank’s efficiency and it varies in different countries during different time periods. In developed countries, researchers dedicated more efforts in investigating conventional banking system only, whereas studies related to Isl. Banking are more related to the developing countries.
Given afore-mentioned facts, we hardly find a single study examining the efficiency of banking system of Pakistan whether Con. or Isl. or both at international level; although few country level studies are available discussing only profitability and size of the banking sector. Akhtar analyzed the X and overall efficiency of Con. Banks only from 1998-99 by using the DEA approach. His study covered only two years’ time period and did not include Isl. Banks in the sample. Attaullah et al. analyzed the effects of privatization on Pakistani and Indian banks by measuring the scale, technical, overall technical efficiency for the time period of 1988-1998 and reported that banking system of Pakistan has experienced improved efficiency after privatization. Recently Khalid examined the effects of privatization on the Pakistani conventional banks only for the time period 1990-2002. This paper adds to the literature by investigating the efficiency of overall, Con. and Isl. Banks in Pakistan for the period 2006-2010,_utilization of recent data and non-parametric econometric technique adds to its significance. The next section provides the detail about methodology used in this study.