Title: Estimation of technical efficiency in banking industry using stochastic frontier analysis

Authors: Farnaz Foroutan; Homayoun Ranjbar; Mehdi Hampaeyan-Miandoab

Addresses: Department of Economics, Faculty of Humanities, Khomeinishahr Branch, Islamic Azad University, P.O. Box 1431635165, Iran ' Department of Economics, Khorasgan Branch, Islamic Azad University, Khorasgan, Iran ' Department of Industrial Engineering, Amirkabir University of Technology, P.O. Box 1386657661, Tehran, Iran

Abstract: Considering the fundamental role of banking system in different economies, an efficient banking system has always been regarded by governments; also, establishment of an efficient network of branches is considered as a major strategy to adjust efficiency improvement programmes within a bank. Accordingly, the present paper aimed to calculate the technical efficiency of 128 branches of Tejarat Bank in Isfahan, Iran, during 2007-2009 through stochastic frontier analysis, Translog production function, and maximum likelihood estimation. The model used in the study was time-varying in efficiency model developed by Battese and Coelli (1992). The obtained statistical results from data fitness indicate that average technical efficiency of Tejarat Bank branches in Isfahan is 95.36% during studied period; that is, 95.36% of loans payable in full efficiency, assuming the same level of inputs, was paid by Tejarat Bank of Isfahan during a three-year period (2007-2008). Moreover, mean technical efficiency of these branches decreased over time.

Keywords: technical efficiency; frontier production function; banking industry; stochastic frontier analysis; Iran; bank efficiency; maximum likelihood estimation.

DOI: 10.1504/IJPQM.2015.070192

International Journal of Productivity and Quality Management, 2015 Vol.16 No.1, pp.54 - 69

Available online: 21 May 2015 *

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