Study on Bank Efficiency in Bangladesh: A Panel Data Analysis

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue XII, December 2019 | ISSN 2454–6186

Study on Bank Efficiency in Bangladesh: A Panel Data Analysis

Md. Nezum Uddin
Assistant Professor, Department of Economics & Banking, International Islamic University Chittagong, Bangladesh

Abstract: – This research aims to assess the efficiency of commercial banks in Bangladesh using a Z score methodology where Z score (efficiency ratio) is the dependent variable constructed by the proportion of total operating expenses and net operating income of banks. Z score is regressed on some other indices. Panel data estimation technique is used from 2015 to 2017. Two models are constructed in this regard while 6(six) explanatory variables comprise in model-1 and in model-2 an additional independent variable along with previous six variables is added. According to the fashion of panel data estimation, two effect models(fixed effect and random effect) are also estimated. For both models, the random effect is found to be suitable. According to the random effect, three variables have found to be a negative effect, and three variables have observed the positive impact on the Z score in model-1. By the same token in model-2 three indices have a negative, and four indices have a positive effect on the Z score. Remarkably GDP growth rate has found a profoundly positive impact of efficiency ratio in both models.

Kew Words: Z score, Panel Data Analysis, Efficiency

I. INTRODUCTION

Banks are the financial institution mobilizes the deposits of the customer in different productive sector playing a pivotal role in the economy. The dynamic banking sector can face the adverse shocks of the economy and keep the financial system stable which promotes economic growth(Islam & Rana, 2017). On the other hand, bankruptcies may lead to a crisis which has a sluggish effect on the overall economy. Measuring efficiency is essential to evaluate the performance of banks in a country. Bank efficiency has been a central concern for depositors, regulators, customers, and investors. Researchers have used different methods to check bank efficiency over the world. Several studies examine bank stability, bank profitability, bank performance, etc. using different variables. Bank’s total income, operating income, operating expense, net profit after tax, total cost, return on asset (ROA), etc. are found as a controlled variable to evaluate the bank stability/ profitability/performance/efficiency in different sophisticated research. Since the financial activities and services of banks increasing, the bank’s efficiency determination is essential for the economy. A large amount of deposit, high level of profitability, and quality service of the customer, the higher compatible and safe environment might be expected if the banking system is proficient(Berger, Hunter, & Timme, 1993).

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