An evaluation of commercial banks performance in Pakistan: A comparative analysis

• Published date: 01 February 2022
• Author: Fahad Najeeb Khan,Riffat Shaheen,Ajmal Waheed,Muhammad Usman Arshad
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2334

ACADEMIC PAPER

An evaluation of commercial banks performance in Pakistan: A

comparative analysis

Fahad Najeeb Khan

1

| Riffat Shaheen

2

| Ajmal Waheed

3

|

Muhammad Usman Arshad

4,5

1

Noon Business School, University of

Sargodha, Sargodha, Pakistan

2

School of Economics & Management, Wuhan

University, Wuhan, China

3

Faculty of Management Sciences, Foundation

University Islamabad, Islamabad, Pakistan

4

Department of Commerce, University of

Gujrat, Gujrat, Pakistan

5

School of Finance, Central University of

Finance and Economics, Beijing, China

Correspondence

Riffat Shaheen, School of Economics &

Management, Wuhan University, Wuhan,

China.

Email: shaheenriffatms13@gmail.com

This study examines the efficiency level of public, private, and foreign banks in

Pakistan during 2014–2017 in order to identify the most efficient type of banks on

the basis of ownership. The study uses data envelopment analysis methodology.

Findings indicate that the efficiency of private and public banks is satisfactory, but

they are not fully efficient and there is a scope for improvement in the performance

of these banks. The private and public sector banks are equally efficient. Results fur-

ther show that foreign banks are very efficient and can be used as a benchmark for

public and private banks in Pakistan.

1|INTRODUCTION

Every organization has certain goals and to achieve these goals, it per-

forms certain activities. To meet the goals, the activities must be per-

formed in an efficient manner. But what efficiency means? How

efficiency is measured? These questions need to be answered. A very

significant role is played by commercial banks in a country's economic

development. It will not be wrong if they are called backbone of the

country's economic system. For a developing country like Pakistan,

their role becomes more important. Due to their importance in the

economic development, the performance measurement of these

banks is necessary. Commercial banks play a role of intermediary

between the demanders and savers of funds (Ahmed & Ahmad, 2016).

They use the customers' deposits for advances to businessmen and

thus facilitate the economic system. They mobilize people's savings

from all over the country and provide to businesses for productive

uses. Savings will remain idle if banks do not perform this important

function of capital formation. For a developing country like Pakistan,

modern and efficient banking system is a pre-requisite (Zaidi, 2006).

Banks create credit in order to provide funds for the development

projects which leads to higher production, sales and employment that

leads to faster economic development. Further, an economy's various

sectors get funds from banks and these sectors play an important part

in a country's economic growth. Hence banks help in the

industrialization of the country which is necessary for economic

development these days (Akhtar, 2002).

According to Friedman (1948), in a country's economic develop-

ment, monetary policy plays an important role. Monetary policy is

defined as a country's central bank's policy regarding interest rate and

money supply. Central bank influences the price level through this

policy. Central bank modifies bank rate (interest rate at which central

bank give loans to commercial banks) to influence money supply in a

country.

Friedman (1960) argued that to maintain low inflation and stable

output growth, monetary supply must be increased at a low constant

rate. Monetary policy can be implemented with the help of all com-

mercial banks. Therefore, in a country's economic development, an

important role is played by commercial banks in this manner.

Commercial banks facilitate the government through providing

loans both long term and short term by purchasing government

securities like government bonds and treasury bills (T-bills). Govern-

ment uses these funds to finance its development projects which

ultimately leads to the economic development. These days, com-

mercial banks have shifted their focus to digital banking (e-banking)

which has greatly facilitated both businesses and general public.

Branchless banking is increasing day by day which leads to greater

efficiency of these banks as resources are utilized in a much

better way.

Received: 11 June 2020 Revised: 30 June 2020 Accepted: 25 July 2020

DOI: 10.1002/pa.2334

J Public Affairs. 2022;22:e2334. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of8

https://doi.org/10.1002/pa.2334