Cost and Profit Efficiency of Bangladeshi Commercial Banks: A Stochastic Frontier Approach
International Journal of Economic Behavior and Organization
Volume 5, Issue 6, December 2017, Pages: 131-142
Received: May 9, 2017; Accepted: May 25, 2017; Published: Dec. 19, 2017
Views 1085      Downloads 73
Bellal Hossain Raju Md., Department of Finance, University of Dhaka, Dhaka, Bangladesh
Article Tools
Follow on us
This paper assesses the cost and profit efficiency levels of banks consist of conventional, Islamic Shariah based and state-owned commercial banks in Bangladesh over the period of 2011 to 2015. Basic accounting ratios and stochastic cost and profit approaches originated by stochastic frontier analysis have been used in this study. From the results of accounting-based ratios used in this study, conventional private commercial banks are more efficient compared to Islamic Shariah based private commercial banks and state-owned commercial banks in the both cases of cost and profit. According to the stochastic cost frontier approach, the commercial banks in Bangladesh are not found considerable cost inefficient. The cost efficiency level of 35 commercial banks in Bangladesh is 91.4 percent. The results of this study indicate that traditional private commercial banks are more cost efficient compared to Islamic Shariah based and state-owned commercial banks. From the results of stochastic profit efficiency frontier, the conventional private commercial banks have the higher values of alternative profit efficiency levels than the state-owned and Islamic Shariah based commercial banks. It can also be drawn that around one-fourth of profits of banks are lost because of inefficiency over the period covered by this study.
Cost Efficiency, Profit Efficiency, Accounting Ratios, Stochastic Cost Frontier Approach, Stochastic Profit Frontier Approach, Commercial Banks, Bangladesh
To cite this article
Bellal Hossain Raju Md., Cost and Profit Efficiency of Bangladeshi Commercial Banks: A Stochastic Frontier Approach, International Journal of Economic Behavior and Organization. Vol. 5, No. 6, 2017, pp. 131-142. doi: 10.11648/j.ijebo.20170506.13
Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License ( which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Ikhide, S. (2000), “Efficiency of Commercial Banks in Namibia”, BON Occasional Paper No. 4. Bank of Namibia, Research Department.
Irsova, Z. B. (2009), “Measuring Bank Efficiency”, Master Thesis, Charles University in Prague, Czechia.
Farrell, M. J. (1957), “The Measurement of Productive Efficiency”, Journal of Royal Statistical Society A 120, Part 3, 253-281.
Smirlock, M. (1985), “Evidence on the (Non) Relationship between Concentration and Profitability in Banking”, Journal of Money, Credit and Banking, 17, 69-83.
Evanoff, D. D. & Fortier, D. L. (1988), “Re-evaluation of the Structure-Conduct-Performance Paradigm in Banking, Journal of Financial Services Research”, 1, 277-294.
Rhoades, S. A. (1986), “The Operating Performance of Acquired Firms in Banking before and after Acquisition”, Staff Study No. 149, Federal Reserve Board.
Srinivasan, A. & Wall, L. D. (1992), “Cost Savings Associated with Bank Mergers”, Working Paper No. 92-2, Federal Reserve Bank of Atlanta, 32, 1251-1266.
Cornett, M. M. & Tehranian, H. (1992), “Changes in Corporate Performance Associated with Bank Acquisition”, Journal of Financial Economics, 31, 211-234.
Berger, A. N., Hunter, W. C. & Timme, S. G. (1993), “The Efficiency of Financial Institutions: A Review and Preview of Past, Present, and Future”, Journal of Banking and Finance, 17, 221-249.
Aigner, D., Lovell, C. A. K. & Schmidt, P. (1977), “Formulation and Estimation of Stochastic Frontier Production Function Models”, Journal of Econometrics, 6, 21-37.
Meesun, W. & Broeck, J. V. D. (1977), “Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error”, International Economic Review, 18 (2), 435-444.
Ferrier, G. D., & Lovell, C. K. (1990), “Measuring Cost Efficiency in Banking: Econometrics and Linear Programming Evidence”, Journal of Econometrics, 46, 229-245.
Okuda, H., Hashimoto, H. & Murakami, M. (2003), “The Estimation of Stochastic Cost Functions of Malaysian Commercial Banks and Its Policy Implications to Bank Restructuring”, Centre for Economic Institutions, Working Paper Series No. 2003-2.
Yildirim, H. S. & Philippatos, G. C. (2007), “Efficiency of Banks: Recent Evidence from the Transition Economies of Europe, 1993-2000”, The European Journal of Finance, 13 (2), 123-143.
Aigner, D. J. & S. F. Chau (1968), “On Estimating Industry Production Function”, American Economic Review, 58, 826-839.
Battese, G. E. & Coelli, T. J. (1988), “Prediction of Firm Level Technical Efficiencies with a Generalized Frontier Production Function and Panel Data”, Journal of Econometrics, 38, 387-399.
Bangladesh Bank, at, April 01, 2017.
Bangladesh Bank (The Central Bank of Bangladesh), “Banking Sector Performance, Regulation and Bank Supervision”, Annual Report: July 2015-June 2016, 05, 28-29.
Battese, G. E. & Coeli, T. J. (1995), “A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data”, Empirical Economics, 20, 325-333.
De Young, R. (1997), “Measuring Bank Cost Efficiency: Don’t Count on Accounting Ratios”, Financial Practice and Education, 20-31.
Samad, A. (2009), “Measurement of Inefficiencies in Bangladesh Banking Industry using Stochastic Frontier Production Function”, Global Journal of Business Research, 3 (1), 41- 48.
FIS (2016), “Five Proven Approaches to Improving Bank Efficiency”, at, April 20, 2017.
Dhaka Stock Exchange, at, April 01, 2017.
Richmond, J. (1974), “Estimating the Efficiency of Production”, International Economic Review, 15 (2), 515-521.
Science Publishing Group
NEW YORK, NY 10018
Tel: (001)347-688-8931