Factors Affecting the Efficiency of Financial Institutions

This analytical paper attempts to carry out an evaluation of the research study’s hypothesis. Analysis will be based on an evaluation of performance and efficiency of 18 banks in the year 2011 (Cooper, Zhu, & Seiford, 2011). Efficiency will be measured using the Data Envelopment Analysis (DEA). The method is used to measure production efficiency. The method compares output and input of the eighteen banks with an aim of ascertaining their efficiency in terms of how much output they produce per given units of output (Ray, 2004). The method also indicates the degree of inefficiencies of various units measured. Based on this method, efficiency is ranked between 0 to 1 or 0 to 100% (Mantri, 2008). In the research, data for inputs and outputs of the various banks are collected. Total input and total output for each bank is computed. The table below summarizes the total input and output for the eighteen banks.

Bank Total input
(AED 000’)
Total output
(AED 000’)
1 Bank of Sharjah PSC. 41,039,354.00 19,625,088.00
2 Abu Dhabi Islamic Bank 140,410,143.00 74,742,006.00
3 Abu Dhabi Commercial Bank 330,038,797.00 197,242,108.00
4 Emirates Islamic Bank 41,615,986.00 22,380,389.00
5 Dubai Islamic Bank 167,587,294.00 78,728,615.00
Commercial bank international 22,306,892.00 10,653,801.00
7 Commercial bank of Dubai 74,373,461.00 38,613,547.00
8 Union National Bank PJSC 158,308,558.00 82,299,962.00
9 United Arab Bank 20,569,319.00 12,428,988.00
10 Sharjah Islamic Bank 33,756,071.00 15,704,247.00
11 Rank Bank 33,494,677.00 26,701,692.00
12 National Bank of Umm 22,517,841.00 11,031,039.00
13 National Bank of Fujairah 27,914,465.00 15,233,770.00
14 National Bank of Abu Dhabi 440,809,899.00 275,805,049.00
15 Mashreq Bank 136,553,005.00 71,361,233.00
16 Invest Bank PSC 20,450,140.00 10,639,247.00
17 First Gulf Bank 291,559,931.00 162,053,579.00
18 Emirates NBD 483,260,789.00 277,030,000.00

From the table, it is not possible to ascertain the efficiency of the banks. A common technique that can be used to compare the performance and efficiency of the various banks is ratio analysis. The next step would entail computing ratios of output and input for each bank. The results are shown in the table below.

Bank Total input
(AED 000’)
Total output
(AED 000’)
Ratio of total output to total input
1 Bank of Sharjah PSC. 41,039,354.00 19,625,088.00 0.478201679
2 Abu Dhabi Islamic Bank 140,410,143.00 74,742,006.00 0.532312014
3 Abu Dhabi Commercial Bank 330,038,797.00 197,242,108.00 0.597633096
4 Emirates Islamic Bank 41,615,986.00 22,380,389.00 0.537783461
5 Dubai Islamic Bank 167,587,294.00 78,728,615.00 0.469776754
6 Commercial bank international 22,306,892.00 10,653,801.00 0.477601317
7 Commercial bank of Dubai 74,373,461.00 38,613,547.00 0.519184484
8 Union National Bank PJSC 158,308,558.00 82,299,962.00 0.519870581
9 United Arab Bank 20,569,319.00 12,428,988.00 0.604248882
10 Sharjah Islamic Bank 33,756,071.00 15,704,247.00 0.465227336
11 Rank Bank 33,494,677.00 26,701,692.00 0.797192103
12 National Bank of Umm 22,517,841.00 11,031,039.00 0.489879958
13 National Bank of Fujairah 27,914,465.00 15,233,770.00 0.545730323
14 National Bank of Abu Dhabi 440,809,899.00 275,805,049.00 0.625677984
15 Mashreq Bank 136,553,005.00 71,361,233.00 0.522589986
16 Invest Bank PSC 20,450,140.00 10,639,247.00 0.520253015
17 First Gulf Bank 291,559,931.00 162,053,579.00 0.555815672
18 Emirates NBD 483,260,789.00 277,030,000.00 0.573251558

From the ratios computed above, it is evident that the Rank Bank has the highest ratio of total input to total output amounting to 0.7972. This is followed by the National Bank of Abu Dhabi with a ratio amounting to 0.6257. The bank with the least total output to total input ratio is Sharjah Islamic bank with a ratio amounting to 0.4652. From the table above, it is only possible to compare the ratios of various banks among themselves. It is not possible to ascertain the degree of efficiency or inefficiency of the banks. To obtain the degree of inefficiency, the ratios of total output to the total input of the banks will be compared to the bank with the highest total output to input ratio. The table below summarizes the ratio of various banks expressed as a percentage of the bank with the highest value that is Rank Bank.

Bank Total input
(AED 000’)
Total output
(AED 000’)
Ratio of total output to total input Efficiency
1 Bank of Sharjah PSC 41,039,354 19,625,088 0.4782 59.99%
2 Abu Dhabi Islamic Bank 140,410,143 74,742,006 0.5323 66.77%
3 Abu Dhabi Commercial Bank 330,038,797 197,242,108 0.5976 74.97%
4 Emirates Islamic Bank 41,615,986 22,380,389 0.5377 67.46%
5 Dubai Islamic Bank 167,587,294 78,728,615 0.4697 58.93%
6 Commercial Bank International 22,306,892 10,653,801 0.4776 59.91%
7 Commercial bank of Dubai 74,373,461 38,613,547 0.5192 65.13%
8 Union National Bank PJSC 158,308,558 82,299,962 0.5199 65.21%
9 United Arab Bank 20,569,319 12,428,988 0.6042 75.80%
10 Sharjah Islamic Bank 33,756,071 15,704,247 0.4652 58.36%
11 Rank Bank 33,494,677 26,701,692 0.7972 100%
12 National Bank of Umm 22,517,841 11,031,039 0.4899 61.45%
13 National Bank of Fujairah 27,914,465 15,233,770 0.5457 68.46%
14 National Bank of Abu Dhabi 440,809,899 275,805,049 0.6257 78.49%
15 Mashreq Bank 136,553,005 71,361,233 0.5226 65.55%
16 Invest Bank PSC 20,450,140 10,639,247 0.5203 65.26%
17 First Gulf Bank 291,559,931 162,053,579 0.5558 69.72%
18 Emirates NBD 483,260,789 277,030,000 0.5732 71.91%

The table below shows the relative efficiency of the banks. The DEA approach cannot show absolute efficiencies of the banks. It only gives the relative figures based on the most efficient banks. The table below summarizes the rank of the banks based on the relative efficiencies.

Bank Relative efficiency
1 Rank Bank 100%
2 National Bank of Abu Dhabi 78.49%
3 United Arab Bank 75.80%
4 Abu Dhabi Commercial Bank 74.97%
5 Emirates NBD 71.91%
6 First Gulf Bank 69.72%
7 National Bank of Fujairah 68.46%
8 Emirates Islamic Bank 67.46%
9 Abu Dhabi Islamic Bank 66.77%
10 Mashreq Bank 65.55%
11 Invest Bank PSC 65.26%
12 Union National Bank PJSC 65.21%
13 Commercial bank of Dubai 65.13%
14 National Bank of Umm 61.45%
15 Bank of Sharjah PSC. 59.99%
16 Commercial Bank International 59.91%
17 Dubai Islamic Bank 58.93%
18 Sharjah Islamic Bank 58.36%

The diagram below shows a scatter plot diagram for combination of total inputs and total outputs for the various banks.

Scatter Diagram

Most of the combinations of total inputs and total outputs tend to lie on a straight line. However, there are some points that are below the line. The banks represented by these points are inefficient. Further, it is important to note that the points which are far away from the origin line represent banks which are superior in terms of efficiency. They show higher efficiency than points which are close to the origin. The line joining all these points is known as efficiency frontier. The diagram below shows the line joining the point above.

Scatter Plot

In summary, the DEA approach gives an ideal means of estimating the relative efficiency of various units under study. The approach compares the input and output of of various units, branches or banks within an organization or an industry. The approach helps an organization or a unit to improve on or do away with areas of inefficiencies.

References

Cooper, W., Zhu, J. & Seiford, L. (2011). Handbook on data envelopment analysis. New York: Cengage Learning.

Mantri, J. (2008). Research methodology on data envelopment analysis. USA: Universal Publishers.

Ray, S. (2004). Data envelopment analysis: Theory and techniques in economics and operations research. United Kingdom: University of Kingdom.

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