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