Measuring efficiency of banks in Saudi Arabia: A data envelopment analysis approach

There are two sectors of banks operating in Indonesia, namely Sharia banks and conventional banks. Improving performance is important in maintaining public confidence in the bank. Efficiency is one of the parameters to measure the performance of Sharia banks. This study measures the comparative level of technical efficiency of Sharia commercial banks and conventional banks by Stochastic Frontier Analysis method during 2011–2015 period by using 10 samples of Sharia commercial banks and conventional banks. Input variables in this study are total deposits, operational costs, and other operational costs. Total financing is an output variable. The results of this study show that total deposits and operational costs have a positive and significant impact on total financing in Sharia and conventional banks. The average score of the technical efficiency of Sharia commercial banks during the period observed is 0.84 and conventional banks is 0.85.

The purpose of this study is to investigate the efficiency of two different banking systems operating in Egypt (Islamic versus conventional banks). A sample of 35 banks has been used to examine the technical efficiency before and after the financial crisis using data envelopment analysis model. Evaluating the technical efficiency of Egyptian banks will enable policymakers to support which banking system is more efficient to facilitate the financial inclusion and enhance the economic development.
Before the financial crisis, conventional banks outperformed conventional banks with Islamic windows and Islamic banks, scale technical efficiency outperformed pure technical efficiency when analyzing conventional banks and conventional banks with Islamic windows. In terms of Islamic banks, pure efficiency outperformed scale efficiency. After the financial crisis, technical efficiency of all banks decreased. However, pure technical efficiency of Islamic banks has improved as a result of the quality of management and outperformed both conventional banks and conventional banks with Islamic windows. These results imply that Islamic banks have not been affected by the financial crisis. Therefore, the increased adoption and support of the Islamic banks in Egypt is addressed to develop the economy and push forward entrepreneurship projects, support the financial inclusion and the informal economy integration.

Despite the widespread use of benchmarking as an effective tool for improving the efficiency of the bank’s functioning, its implementation does not take into account the relation between comparable performance indicators, the choice of benchmark for comparison, deviations of indicators from target values with stages of the bank’s life cycle, which cause differences in the intensity and characteristics of development of financial institutions. The procedure for identifying a reference bank for comparison is also insufficiently specified, which is important in terms of adapting its experience by the recipient bank due to the possible fundamental differences in their functioning. Therefore, the article has modified the technology of benchmarking of the bank’s performance based on the life cycle concept and the DEA approach.
The research is based on the use of the DEA method to determine the most efficient bank as a reference bank in benchmarking comparison; canonical analysis – for the formation of a list of indicators of bank performance; cluster analysis – to substantiate the levels of deviations of the actual values of comparable indicators from the target ones.
The study envisages, firstly, the selection of indicators for benchmarking comparisons based on the identification of causal relationships between the indicators of subsystems “Finance”, “Customers”, “Business processes”, “Personnel development” that arise at each stage of a bank’s life cycle; secondly, the choice of a benchmark bank for comparison according to the maximum value of the performance indicator calculated through the DEA method for a set of banks that are at one and the same stage of their life cycle; thirdly, definition of the range of deviations (low, permissible, critical) of the actual values of comparable indicators of the effectiveness of management of finance, customer base, business processes and personnel of the bank from the target ones. A practical testing of the benchmarking technology was carried out on the example of Ukrainian banks, whose stage in 2016 was identified as “intense growth”.