X-Efficiency in Banking Industry – Evidence from South Asian Economy

Around the globe, a number of researches are conducted to measure the X-efficiency of banking sector. The obvious reason is that economic growth, macroeconomic stability and expansion of monetary policy are directly dependent on banking sector performance and efficiency in any country (Berger & Humphrey, 1997). In order to measure the banking efficiency, some parametric and non-parametric frontier analysis techniques are commonly used. After financial crises of 2007, the banking Industry of Pakistan witnessed deregulation resulting in massive cost rationalization and rightsizing. In Pakistan, few studies are conducted to gauge the X-efficiency in banking sector and those too before the financial crises. So in order to measure recent X-Efficiency, this study was conducted using Non-Parametric efficient frontier approach known as DEA. Data was obtained for 32 banks operating in Pakistan. The data is further subdivided into (1) Government banks (2) Local Banks (3) Foreign banks (4) Islamic Banks and (5) All Banks. Results of the study indicate uniform efficiency among local and foreign banks but local conventional banks are ahead of Islamic banks in terms of efficiency