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REPORT ON

How Efficient the Bangladeshi Banks

are:

A Data Envelopment Analysis (DEA)

Approach

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PATUAKHALI SCIENCE AND TECHNOLOGY

UNIVERSITYHow Efficient the Bangladeshi Banks are: A Data

Envelopment Analysis (DEA) Approach

Prepared for

M. Takibur Rahman

LecturerDepartment of Accounting & Information System

Faculty of Business Administration and Management

Prepared by

Group: 01(Warrior)

Level- 4, Semester- II

Faculty of Business Administration and Management

International Finance

Course Code: FIN-422

Date of submission: 19th December 2009

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PATUAKHALI SCIENCE AND TECHNOLOGY

UNIVERSITY

Attendance Report

Level: 4

Semester: II

Course Code: FIN-422

Course Title: International FinanceDate of Preparation: 19 December, 2009

Evaluation Details

ExamRoll

ClassRoll

Name of the

students

Registration

Signature

Preparation

(5)

Presentation

(10)

Examination

QA(5)

Total marks

obtained

01 001Md.Kamruzzaman

00675

06 009 Shuvradeb Barai 00668

15 021 Abu Zafour 00680

17 023 Shofiq Uddin Khan 00682

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Date: 19 December 2009

To

M. Takibur Rahman

Lecturer

Department of Accounting & Information System

Faculty of Business Administration and Management

Subject: Letter of Transmittal

Dear Sir,

Here is the report on How Efficient the Bangladeshi Banks are: A

Data Envelopment Analysis (DEA) Approach you asked us to

prepare this report as a course requirement of International

Finance.

This report focuses on the efficiency of Bangladeshi Banks

broadly the National. We have tried our level best to make the

report informative and fruitful. For any classification we will be

available and looking for such term paper in coming days. We are

very happy for getting such type of report from you.

Sincerely Yours

Group: 01(Warrior)

Level-4, Semester-II

Faculty of Business Administration and Management

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Acknowledgment

At first we desire to express our deepest sense of gratitude of almighty

Allah.

With profound regard we gratefully acknowledge our respected course

teacher M. Takibur Rahman, Department of Accounting & Information

System, Faculty of Business Administration and Management for his

generous help and day to day suggestion during the survey.

We like to give thanks especially to our friends & many individuals, for

their enthusiastic encouragements and helps during the preparation of

this report and for their assistance in typing and proofreading this

manuscript.

Executive Summary

This report is an assigned job as a partial fulfillment of course

requirement by honorable Course teacher M. Takibur Rahman,

Department of Accounting & Information System, Faculty of Business

Administration and Management, Patuakhali Science and Technology

University. It is the optimum aggregated outcome of 4 pupils about

How Efficient the Bangladeshi Banks are: A Data Envelopment

Analysis (DEA) Approach. The view of this report is to find out the

efficiency and effectiveness of Banking Company of Bangladesh broadly

the National Banks. According to our report we try to found the efficiency

level of the selected Banks. For improving the efficiency, this report has

assisted conducting several studies on banking sector reform in

Bangladesh.

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Table of Contents

CHAPTER I

Abstract 01

Introduction 01

Origin of the report 02

Purpose of the report 02

Scope of the Report 02

Methodology of the report 03

Limitation of the report

04 Literature of Review

05

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Abstract

Improving the efficiency of the banking sector has been considered an

important issue in Bangladesh. In 1986, the Government formed the

national commission on money banking and credit to find solutions forefficient operation and management of the banking system. In addition, in

1991 a taskforce was formed to formulate strategies to promote the

development of banking and financial sector. Bangladesh Bank (BB)

continued to focus on strengthening the financial system and improving

functioning of the various segments. The broad parameters of the reforms

undertaken during the year comprised ongoing deregulation of the

operation of institutions within the BB's regulatory ambit, tightening of

prudential regulation and improvement in supervisory oversight,

expanding transparency and market disclosure, all with a view toimproving overall efficiency and stability of the financial system.

Inefficiency in the use of resources, tolerance of waste and slothfulness

CHAPTER II

An Overview of the Bangladesh Banking Sector 06

Nationalized Commercial Banks 06

Private Commercial Banks 07

Methods of Evaluating the Efficiency of Banks 08

Data Envelopment Analysis (DEA) 08

Overview of Nationalized Commercial Banks 12

Four Nationalized Bank of Bangladesh at a Glance 14

Performance of Performance of Public Sector

Banksof Bangladesh during 2007-2008

15

Efficiency (Inputs) of Banks of Bangladesh19

Efficiency (Outputs) of Banks of Bangladesh 20

Chapter-III

Conclusion 24

Reference 24

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also contributes to low productivity as often reflected in high spread. This

paper is attempts to measure the efficiency of Bangladeshi public sector

banks during 2007-2008 using the variety of efficiency measures

computed by the nonparametric method. This paper investigates the

efficiency of public sector banks in Bangladesh using data envelopment

analysis.

Introduction

Efficiency of banking sectors is too much important for a country. For

improving the efficiency, the World Bank has assisted conducting several

studies on banking sector reform in Bangladesh. Based on the

experienced during the 1986-1991 periods and suggestions from World

Banks studies, the Central Bank of Bangladesh (CBB) has adopted

further reforms such as strengthening the role of the central bank insupervision and regulation. The need for further improvement of the

banking sector continues. Recently, the Governor of CBB stressed the

need for an efficient banking sector. The CBB also urged that more

research on the banking sector of Bangladesh to be conducted.

Meanwhile, no previous study, to the best of our knowledge, has

examined the efficiency of commercial banks in Bangladesh. To fill in the

gap of research, this study is conducted to measure and to analyze the

efficiency of commercial banks in Bangladesh. The main objective of this

study is to analyze the efficiency of public sector banks of Bangladeshand identify determinants of efficiency.

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Origin of the report

We are lucky to say that our honorable course teacher M. Takibur

Rahman, Lecturer, Department of Accounting and Information System,Faculty of Business Administration and Management, assigned us a report

on How Efficient the Bangladeshi Banks are: A Data

Envelopment Analysis (DEA) Approach. The data required for the

preparing this report has been collected from the annual reports of

Bangladesh bank and annual reports of other banks of Bangladesh during

2007-20008.

Purpose of the Report

The purpose of the study was to measure the efficiency of different banks

in Bangladesh during 2007-2008. The major objectives of this study are

stated as follows:

To perform comparative efficiency studies of the Public Sectors

Banks in Bangladesh

To allocate resources more efficiently

To identify potential improvements

To perform reference comparison and reference contribution

To obtain information for planning strategy

To identify under achievers and star performers

To obtain reference set frequency distribution graph To perform overall improvement summary.

Scope of the Study

This study has focused upon the efficiency of the banking sectors of

Bangladesh. How the Bangladeshi Banks are performed their

activities efficiently and effectively. We hope this study will help us

to know more clearly about the performance of different banks of

Bangladesh.

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Methodology of the Report

Efficiency analysis methods can be classified into two main approaches,namely, parametric approach and non-parametric approach. The

parametric approach such as Stochastic Frontier Analysis (SFA) was

characterized with a composite error term of the estimated production

function. This composite error term consists of a random error

component and a non-negative inefficiency component. The non-

parametric approach such as Data Development Analysis (DEA) is a data-

driven approach. DEA involves the calculation of efficiency by comparing

the inputs/outputs ratio of each firm with a piecewise surface,

representing fully efficient operation, constructed from the data set bylinear programming. In this paper we use Non-parametric approach.

Improving the efficiency of the banking sector has been considered an

important issue in Bangladesh. Its plays a significant role for the

economic development of a country. This report mainly focuses on the

state owned banks in Bangladesh that means Nationalized Commercial

Banks. This report is prepared based on the only secondary data. We

collect required information from the annual report of Bangladesh bank,and four states owned commercial banks during 2007-2008. Here we

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divided our required information into two aspects, such as input data and

output data. The following inputs and outputs have been selected for the

study:

1. Input data

2. Output data

1. Input data

Number of branches

Number of employees

Interest expense/total assets (Int. exp/ T.A.)

Operating expense/total assets (Op. exp/ T.A.)

2. Output data

Interest income/total assets (Int. Inc/ T.A.)

Spread

*

/total assets (Spread/ T.A.) Net profit/total assets (N.P. / T.A.)

Gross profit/total assets (G.P/ T.A.)

* Spread = Interest income Interest expense

Then we analyze those data from many angles, in different aspect andpresent the information in different segment according to their category,

in compact way. We highlight different important things, which we found

during study period. After doing all of those we submit the report to the

proper authority.

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Limitations of the Report

As a student of faculty of Business Administration and Management, 8th

semester, this is our initiative for making a report on How Efficient the

Bangladeshi Banks are: A Data Envelopment Analysis (DEA)

Approach through using its Annual Report of Bangladesh Bank, andalso annual report Agrani Bank, Sonali Bank, Ruupali Bank and Jjanata

Bank. Beside this we have faced the following hindrances in preparing

this report:

Lack of knowledge and experience

Short of time

Lack of computer facilities

Lack of sufficient privileges

Lack of communication facilities

Lack of adequate information

This is our truthful declaration that the report is prepared on secondary

data. But in some cases, we found the problem of shortage of necessary

data and that cases we will take hypothetical data, so there is a little

chance of misappropriation.

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Literature of Review

The study on the efficiency of financial institution is now quite largely

happening in the recent origin. Several effective work are already been

occurred depending on various factors and circumstances and it will help

the financial institution to become more effective and advanced than the

any previous worse situation. Banks are the main financial institution andseveral works and already been occurred to measuring their efficiency.

Frontier inefficiency, some time called X-efficiency, at financial

institutions accounts for a considerable portion of the total costs are a

much greater sources of performance problems than either scale or

product mix inefficiencies and have a strong empirical association with

hither probabilities of failures(Bauer et. Al. 1998).

Shameem, A.K.M. prepare an important report on Impact of FlexibleInterest Rate on Savings and Investment, which effectively measure the

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effectiveness of the saving and investing opportunity of the different

financial institution basically bank.

Another important study work is done by Berger, A.N. and D.B. Humphrey

(1997), on Bangladesh Journal of Political Economy named Efficiency ofFinancial Institutions: International Survey and Directions for Future

Research.

In another group of studies, bank efficiency measured b a number of

financial indicators and compared over various categories of banks. For

example Sarkar et. Al. (1998) considered three bank groups-public,

Bangladeshi private and foreign- for comparison purpose. After

controlling for effects of some concomitant variables, they conductedregressing analysis to find that effect of ownership type on different

efficiency measures. Rammohan (2002, 2003) also used financial

measures for comparing operational performance of different categories

of banks over a period of time.

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An Overview of the Bangladesh Banking Sector

The banking sector in Bangladesh comprises four types of banks,

including nationalized commercial banks (NCBs), government-owned

specialized banks (DFIs), private commercial banks (PCBs), and foreign

commercial banks (FCBs). There are 48 banks in Bangladesh. These

banks had a total number of 6717 branches as of 2008. The number of

bank branches increased in compare to the previous year from 6562 to

6717 owing to opening of new branches by the PCBs during the year.

List of banks in Bangladesh

The commercial banking system dominates Bangladesh's financial sector.

Bangladesh Bank is the Central Bank of Bangladesh and the chief

regulatory authority in the sector. The banking system consists of four

nationalized commercial Banks, around forty private commercial

banks, nine foreign multinational banks and some specialized banks.

The Nobel-prize winning Grameen Bank is a specialized micro-

finance institution, which revolutionized the concept of micro-credit

and contributed greatly towards poverty reduction and the

empowerment of women in Bangladesh.

Nationalized Commercial Banks

The banking system of Bangladesh is dominated by the 4 Nationalized

Commercial Banks, which together controlled more than 54% of

deposits and operated 3388 branches (54% of the total) as of

December 31, 2004. The nationalized commercial banks are:

Sonali Bank Janata BankAgrani Bank Rupali Bank

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http://en.wikipedia.org/wiki/Bangladesh_Bankhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/Sonali_Bankhttp://en.wikipedia.org/wiki/Janata_Bankhttp://en.wikipedia.org/wiki/Agrani_Bankhttp://en.wikipedia.org/wiki/Rupali_Bankhttp://en.wikipedia.org/wiki/Bangladesh_Bankhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/Sonali_Bankhttp://en.wikipedia.org/wiki/Janata_Bankhttp://en.wikipedia.org/wiki/Agrani_Bankhttp://en.wikipedia.org/wiki/Rupali_Bank

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Foreign Banks Specialized BanksCitibank na Grameen BankHSBC Bangladesh Krishi BankStandard Chartered

Bank

Bangladesh Shilpa Bank

Commercial Bank ofCeylon Rajshahi Krishi Unnayan Bank

State Bank of India Bangladesh Shilpa Rin SangsthaHabib Bank Basic Bank Ltd (Bank of Small Industries and

Commerce)National Bank of

Pakistan

Bangladesh Somobay Bank Limited(Cooperative

Bank)Woori Bank Ansar VDP Unnyan BankBank AlfalahICB Islami Bank

Private Commercial Banks

Private Banks are the highest growth sector due to the dismal

performances of government banks. They tend to offer better service and

products.

Private Commercial BanksAB Bank Ltd BRAC Bank LimitedEastern Bank Limited Dutch Bangla Bank LimitedDhaka Bank Limited Islami Bank Bangladesh LtdPubali Bank Limited Uttara Bank LimitedIFIC Bank Limited National Bank LimitedThe City Bank Limited United Commercial Bank LimitedNCC Bank Limited Prime Bank LimitedSouthEast Bank Limited Al-Arafah Islami Bank LimitedSocial Islami Bank Limited Standard Bank LimitedOne Bank Limited Exim Bank LimitedMercantile Bank Limited Bangladesh Commerce Bank

LimitedMutual Trust Bank Limited First Security Islami Bank LimitedThe Premier Bank Limited Bank Asia Limited

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http://en.wikipedia.org/w/index.php?title=Citibank_na&action=edit&redlink=1http://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/w/index.php?title=Bangladesh_Krishi_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_Chartered_Bankhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_Chartered_Bankhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Bank&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Commercial_Bank_of_Ceylonhttp://en.wikipedia.org/wiki/Rajshahi_Krishi_Unnayan_Bankhttp://en.wikipedia.org/wiki/Commercial_Bank_of_Ceylonhttp://en.wikipedia.org/wiki/Rajshahi_Krishi_Unnayan_Bankhttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Rin_Sangstha&action=edit&redlink=1http://en.wikipedia.org/wiki/Habib_Bankhttp://en.wikipedia.org/w/index.php?title=Basic_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/National_Bank_of_Pakistanhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Somobay_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/National_Bank_of_Pakistanhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Somobay_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Woori_Bankhttp://en.wikipedia.org/w/index.php?title=Ansar_VDP_Unnyan_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Bank_Alfalahhttp://en.wikipedia.org/w/index.php?title=ICB_Islami_Bank&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=AB_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Brac_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Eastern_Bank_Ltdhttp://en.wikipedia.org/wiki/Dutch_Bangla_Bankhttp://en.wikipedia.org/wiki/Dhaka_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=Islami_Bank_Bangladesh_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Pubali_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Uttara_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/IFIC_Bank_Limitedhttp://en.wikipedia.org/wiki/National_Bank_(Bangladesh)http://en.wikipedia.org/w/index.php?title=The_City_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=United_Commercial_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=NCC_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Prime_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=SouthEast_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Al-Arafah_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Social_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Standard_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=One_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Exim_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mercantile_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Commerce_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Commerce_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mutual_Trust_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=First_Security_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=The_Premier_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_Asia_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Citibank_na&action=edit&redlink=1http://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/w/index.php?title=Bangladesh_Krishi_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_Chartered_Bankhttp://en.wikipedia.org/wiki/Standard_Chartered_Bankhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Commercial_Bank_of_Ceylonhttp://en.wikipedia.org/wiki/Commercial_Bank_of_Ceylonhttp://en.wikipedia.org/wiki/Rajshahi_Krishi_Unnayan_Bankhttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/w/index.php?title=Bangladesh_Shilpa_Rin_Sangstha&action=edit&redlink=1http://en.wikipedia.org/wiki/Habib_Bankhttp://en.wikipedia.org/w/index.php?title=Basic_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/National_Bank_of_Pakistanhttp://en.wikipedia.org/wiki/National_Bank_of_Pakistanhttp://en.wikipedia.org/w/index.php?title=Bangladesh_Somobay_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Woori_Bankhttp://en.wikipedia.org/w/index.php?title=Ansar_VDP_Unnyan_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Bank_Alfalahhttp://en.wikipedia.org/w/index.php?title=ICB_Islami_Bank&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=AB_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Brac_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Eastern_Bank_Ltdhttp://en.wikipedia.org/wiki/Dutch_Bangla_Bankhttp://en.wikipedia.org/wiki/Dhaka_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=Islami_Bank_Bangladesh_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Pubali_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Uttara_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/IFIC_Bank_Limitedhttp://en.wikipedia.org/wiki/National_Bank_(Bangladesh)http://en.wikipedia.org/w/index.php?title=The_City_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=United_Commercial_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=NCC_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Prime_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=SouthEast_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Al-Arafah_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Social_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Standard_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=One_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Exim_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mercantile_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Commerce_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Commerce_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mutual_Trust_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=First_Security_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=The_Premier_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_Asia_Limited&action=edit&redlink=1

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Trust Bank Limited Shahjalal Islami Bank LimitedJamuna Bank Limited

Methods of Evaluating the Efficiency of Banks

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Efficiency analysis mainly classified into two approach, parametric

approach and non-parametric approach. In the following graph shown

the different methods of efficiency analysis

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Data Envelopment Analysis (DEA)

Overview

Efficiency measurement is one aspect of firm performance. Efficiency is

measured with respect to an objective; it can be measured with respect

to maximization of output, maximization of profits, or minimization of

costs. We would like to investigate questions of economic optimization.

For example,

Is the firm minimizing its costs of production given its choice of inputs,

taking input prices as given?

Is the firm maximizing its profits given its choice of inputs and outputs

prices as given?

A firm might be operating on its production frontier i.e. not wasting

resources, and so be technically efficient, but could still be allocativelyinefficient if it is choosing the wrong mix of inputs given the relative

process of those inputs. Similarly, the firm could be technically and

allocatively efficient in producing its chosen level of output, but choosing

the wrong level of output in order to maximize profits.

Data Envelopment Analysis (DEA)

Technique has been used remarkably in recent years to measure

efficiency of firms in the light of above questions.

DEA is a linear programming technique initially developed by Charnes,

Cooper and Rhodes in 1978 to evaluate the efficiency of public sector

non-profit organizations. Sherman and Gold in 1985 were the first to

apply DEA to banking. DEA calculates the relative efficiency sources of

various Decision Making Units (DMUs) in the particular sample. The DMUs

could be banks or branches of banks. The DEA measure compares each

of the banks/ branches in that sample with the best practice in thesample. It tells the user which of the DMUs in the sample are efficient and

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which are not. The ability of the DEA to identify possible peers or role

models as well as simple efficiency scores gives it an edge over other

methods. As an efficient frontier technique, DEA identifies the inefficiency

in a particular DUM by comparing it to similar DMUs regarded as efficient,

rather than trying to associate a DMUs performance with statistical

averages that may not be applicable to that DMU.

DEA is a multi-factor productivity analysis model for measuring the

relative efficiencies of a homogenous set of decision making units

(DMUs). The efficiency score in the pre-efficient multiple input and out

put factors defined as

IntputsofSumWeighted

OutputsofSumWeighted=Efficiency

Benefits and Limitations of DEA Analysis:

DEA offers some benefits to other appearances but it also has some

limitations that have to be kept in the mind when using DEA. Benefits and

limitations of DEA analysis are discussed below:

Benefits

DEA is able to handle multiple inputs and outputs

DEA does not require a functional form that relates inputs and

outputs

DEA optimizes on each individual observation and compares them

against the best practice observations

Limitations

DEA only calculates relative efficiency measures

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As a non comparable technique statistical hypothesis test are quit

different

Different DEA Models

Data envelopment analysis is not just one single methods, this analysis is

a collection of different methods which serve different needs depending

on scale effects, measurement of the distance to the envelopment

surface or the functional form of the envelopment analysis. Usually in

literature four different characteristics of the DEA are differentiated

CCR model (Charnes, Cooper and Rhodes in 1978)

BCC model (Banker, Charnes and Cooper in 1984)

Multiplicative model (Charnes Cooper, Seiford and Stutz in 1983)

Additive model (Charnes, Cooper, Golany, Seiford and Stutz in

1985)

CCR model (Charnes, Cooper and Rhodes in 1978)

The CCR model bases the evaluation on a production technology that has

constant returns to scale (CRS) and radial distance measure to the

efficient frontier i.e. that the inefficiency of a DMU compared to the

corresponding efficient units lying on the efficient border is measured via

a radius vector.

The CCR model is differentiated in input or output orientation, depending

upon reduction of inputs with constant outputs or enhancement of output

with constant input. As a result the CCR models an objective description

of overall efficiency and identifies the sources of inefficiencies.

BCC model (Banker, Charnes and Cooper in 1984)

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In constant to the CCR model the BCC model offers a differentiation

between technical efficiency and scale-efficiency because it evaluates

solutions for non increasing returns to scale (NIRS), non decreasing

returns to scale (NDRS) or variable returns to scale (VRS). With a

combination of the CCR model inefficient CCR DMUs do not have to be

technical inefficient. Potentially a part of this inefficiency can bemitigated by increasing or decreasing the production volume resulting in

a removal of scale inefficiencies. The BCC model also implies a radial

distance measure and a piecewise linear frontier. Like the CCR model the

BCC model also differentiates in and input or outputs orientation.

Multiplicative model (Charnes Cooper, Seiford and Stuz in 1983)

In contrast to the CCR and BCC model the multiplicative model offers a

different characteristic of the efficient frontier by providing a piecewise

log-linear involvement surface or a piecewise Cobb-Douglas

interpretation of the production process. The returns to scale assumption

depend on the envelopment surface:

A log-linear surface assumes constant returns to scale and a Cobb-

Douglas coherence assumes variable return to scale.

Additive model (Charnes, Cooper, Golany, Seiford and Stutz in

1985)

Unlike the CCR or BCC model the additive model is un-oriented that is it

does not differentiate between input and output orientation which means

that a reduction of input with a synchronous enhancement of outputs ispossible. The additive model assumes constant returns to scale and

piecewise linear efficient frontier.

These four models in literature commonly used and described DEA

models build a profound basis for an efficiency analysis with different

returns to scale, different envelopment surfaces and different ways to

project inefficient units to the efficient frontier. During the last few years

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a lot of extensions to these four models have been developed that allow

further fine tuning to the basic models.

Assumption of the Study

The following assumptions are made for the benefit of the study

An output maximization model has been adopted

Variable returns to scale (VRS) has been adopted as using this

option allows the analysis more room to find optimal solution

This is an un-weighted analysis. No weights have been assigned to

any inputs and outputs.

Decision Making Units (DMUs)

The following are the decision making units (DMUs).

Concerning these input and output data the application of the Data

Envelopment Analysis seems to be suitable. Data Envelopment Analysis

uses input and output factors to identify a single relative efficiency

measure to compare a DMU to the best performing organizations. Thismethod does not require monetary inputs and outputs. Further more it

uses combinations of efficiency units to compare inefficient units against

these linear combinations and identifies their relative efficiency scores.

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Overview of Nationalized Commercial Banks

Sonali Bank Limited

Sonali Bank Limited, the largest & leading commercial bank of the

country, came into being in 1972 immediately after the emergence ofBangladesh as an independent state. A fully state-owned enterprise, thebank has been discharging its nation-building responsibilities byundertaking government entrusted different socio-economic schemes aswell as money market activities of its own volition, covering all spheres ofthe economy. Sonali Bank Limited singularly enjoys the prestige of beingthe agent of the Central Bank of Bangladesh in such places where theguardian of the money market has chosen not to act by itself.

Sonali Bank Limited is governed by a Board of Directors consisting of

13(thirteen) members headed by a Chairman. The Bank is headed by theChief Executive Officer & Managing Director, who is a well-known Bankerand a reputed professional. The head office of the bank along with itscorporate structure is located at Motijheel, Dhaka, and the maincommercial center of the capital.

Janata Bank Limited

Janata Bank Limited, one of the state owned commercial banks inBangladesh, has an authorized capital of Tk. 8000 million (approx. US$116.96 million), paid up capital of Tk. 2593.90 million, reserve ofTk.4182.52 million and retained surplus Tk. 2285.94 million. The Bankhas a total asset of Tk. 267157.30 million as on 31st December 2008.Immediately after the emergence of Bangladesh in 1971, the erstwhileUnited Bank Limited and Union Bank Limited were renamed as JanataBank. On 15th November, 2007 the bank has been corporatised andrenamed as Janata Bank Limited.

Janata Bank Limited operates through 850 branches including 4 overseasbranches at United Arab Emirates. It is linked with 1202 foreigncorrespondents all over the world.

The Bank employs more than 13(Thirteen) thousand persons.

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The mission of the bank is to actively participate in the socio- economicdevelopment of the nation by operating a commercially sound bankingorganization, providing credit to viable borrowers, efficiently deliveredand competitively priced, simultaneously protecting depositors fundsand providing a satisfactory return on equity to the owners.

The Board of Directors is composed of 13 (Thirteen) members headed bya Chairman. The Directors are representatives from both public andprivate sectors.

The Bank is headed by the Chief Executive Officer & Managing Director,who is a reputed banker.

The corporate head office is located at Dhaka with 10 (ten) Divisionscomprising of 37 (thirty seven) Departments.

Agrani Bank Limited,

Agrani Bank Limited, a leading commercial bank with 867 outlets

strategically located in almost all the commercial areas throughout

Bangladesh, overseas Exchange Houses and hundreds of overseas

Correspondents, came into being as a Public Limited Company on May

17, 2007 with a view to take over the business, assets, liabilities, rights

and obligations of the Agrani Bank which emerged as a nationalizedcommercial bank in 1972 immediately after the emergence of

Bangladesh as an independent state. Agrani Bank Limited started

functioning as a going concern basis through a Vendors Agreement

signed between the ministry of finance, Government of the People's

Republic of Bangladesh on behalf of the former Agrani Bank and the

Board of Directors of Agrani Bank Limited on November 15, 2007 with

retrospective effect from 01 July, 2007.

Agrani Bank Limited is governed by a Board of Directors consisting of13(thirteen) members headed by a chairman. The Bank is headed by the

Managing Director & Chief Executive Officer; Managing Director is

assisted by Deputy Managing Directors and General Managers. The bank

has 7 Circle offices, 30 Divisions in head office, 52 zonal offices and 903

branches including 10 corporate and 40 AD( authorized dealer) branches.

The corporate and AD branches are authorized to deal in Foreign

exchange business.

Rupali Bank Limited

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Rupali Bank is a commercial bank in Bangladesh. It was established as a

nationalised bank in 1972 under the Bangladesh Banks Nationalisation

Order, through the amalgamation of the branches of Muslim Commercial

Bank, Australasia Bank and Standard Bank that were operating in East

Pakistan, following the 1971 Bangladesh Liberation War. The bank was

denationalised in 1986, and reorganised as a limited company, with theGovernment of Bangladesh holding 51% shares. However, after the year

2000, the Government divested of its shares, and the privatization of the

bank was complete.

Four Nationalized Bank of Bangladesh at a Glance

Sonali Bank LimitedType Public Limited CompanyFounded 1972Headquarters Motijheel, Dhaka, Bangladesh

Area served Bangladesh and OverseasKey people Ali Imam Majumder{Chairman)

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S. A. Chowdhury (CEO & ManagingDirector))

Industry BankingFinancial services

Products Finance and insuranceConsumer BankingCorporate BankingInvestment BankingInvestment Management

Employees 26,085Website http://www.sonalibank.com.bd

Agrani Bank LimitedType Public Limited CompanyFounded March 26, 1972Headquarters Dilkusha commercial area, Dhaka,

BangladeshArea served BangladeshKey people Dr. Khondoker Bazlul Hoque{Chairman)Industry Banking

Financial servicesProducts Finance and insurance

Consumer BankingCorporate BankingInvestment BankingInvestment Management

Employees 13,269Website http://www.agranibank.org

Janata Bank LimitedType Public Limited CompanyFounded 1971Headquarters Motijheel, Dhaka, BangladeshArea served Bangladesh and OverseasIndustry Banking

Financial servicesProducts Finance and insurance

Consumer BankingCorporate BankingInvestment BankingInvestment Management

Employees 13,593Website http://www.janata_bank.com

Rupali Bank LimitedType Public Limited Company

Founded 1972Headquarters Motijheel, Dhaka, Bangladesh

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Area served Bangladesh and OverseasIndustry Banking

Financial servicesProducts Finance and insurance

Consumer BankingCorporate BankingInvestment BankingInvestment Management

Employees 14,500Website http://www.rupali_bank.com

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Performance of Performance of Public Sector Banks of

Bangladesh during 2007-2008

Performance of public sector banks of Bangladesh can be measured by

the different elements. Based on these previously discussed elements,

performance of these banks are shown below by representing different

table, graph and chart.

Table-1: Performance of Public Sector Banks of Bangladesh during 2007-

2008

Inputs Outputs

Sl.

N

o.

Public

Sector

Banks

No. of

Employe

es

No. of

Branch

es

Total

Assets

(million)

Interes

t

Expens

e

(millio

n)

Operati

ng

Expens

e

(million

)

Interes

t

Income

(millio

n)

Spread

(million

)

Net

Profit

(millio

n)

Gross

Profit

(millio

n)

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01 Sona

li

B

a

n

k

26,085 1,183 492,94

6

12,87

9

6,432 26,62

1

13,74

2

1,616 19,67

5

02 Janata

B

a

n

k

13,593 850 267,158

9,307

4,613 12,953

3,646

3,187 11,615

03 Agra

n

i

B

an

k

13,269 903 187,32

6

5,24

1

3,410 9,547 4,30

6

2,646 6,329

04 Rupa

li

B

a

n

k

14,500 875 220,47

1

4,09

8

3,543 8,852 4,75

4

1,996 4,645

Total 67,447 3,811 1,167,9

01

31,5

25

17,99

8

57,97

3

26,4

48

9,445 42,26

4

Table-1 represents the different input and output condition of four

nationalized commercial bank (Sonali Bank, Janata Bank, Agrani Bank,

Rupali Bank). Among these banks Sonali Bank has the highest number of

employees and branches i.e. 26,085 and 1,183 respectively. Side by side

total assets, interest income, spread and gross profit are also highest

than that of other three banks (Janata Bank, Agrani Bank, Rupali Bank).

But this banks income falls during this year than that of previous year

2007. Graph-1 shows the position of these four banks number of

employees and number of branches, and graph-2 shows about the total

assets of these four banks.

Graph-1: Number of branches and employees

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Graph-2: Assets of Nationalized Commercial Banks in Bangladesh

Graph-3 represents the different elements of decision making units

graphically. This graph includes the interest expenses, interest income,

operating expenses, net income and gross profit of these four banks. In

respect to the gross profit Sonali bank is in the best position than other

three banks, Janata bank is in the second position, then Agrani bank and

last on is Rupali bank. But net income of the Sonali Bank is relatively

lower than other three banks. Sonali banks net income also decreases

than that of the previous year about 30 percent.

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Graph-3: Interest, Income and Expenses

Table-2: Performance of Public Sector Banks of Bangladesh during 2007-

2008

Inputs Outputs

Sl.

No.

Public

Sector

Banks

Int.

Exp/T.A. %

Op.

Exp./T.A.

%

Int.

Inc./T.A.

%

Spread/T.A

. %

N.P./T.A.

%

G.P./T.A. %

01 Sonali

Bank

2.61 1.30 5.40 2.79 0.33 3.99

02 Janata

Bank

3.48 1.73 4.85 1.36 1.19 4.35

03 Agrani

Bank

2.80 1.82 5.10 2.30 1.41 3.38

04 Rupali

Bank

1.86 1.61 4.02 2.15 0.91 2.11

The performance of public sectors banks operating in Bangladesh during2007-2008 represented in the Table-2. This table shows the different

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inputs and outputs, and their relative measure. In inputs we calculate

interest expenses of specified banks against the total assets of the

relative bank. Janata Bank represents highest interest (3.48%) expense

against its assets, where as Agrani Banks is 2.807%, Sonali Banks is

2.61% and Rupali Banks represent 1.86%. In case of operating expense

Agrani Bank is 1.82% of its total assets. Then Janata Bank is 1.73%,1.61% and 1.30% for Rupali Bank and Sonali Bank respectively.

In outputs represent the interest income to total assets, spread to total

assets, net profit to total assets and gross profit to total assets. All out

puts calculated in percentage. Sonali bank represents the higher interest

income against total assets, and lower rate in Rupali Bank. In case of

spread to total assets Sonali Bank is in the highest position than that of

other three banks. Janata Bank is in the lowest position among these fourbanks. In respect to the net income Sonali Bank is not in good position

during 2008 because in this year net income of this bank significantly

decreases than that of its previous year. Gross profit of Sonali Bank is

3.99%, Agrani Bank is 3.38%, Janata Bank is 4.35% and Rupali Bank is

2.10%. Janata Bank is in the best position in respect to other banks in

Bangladesh during 2007-2008.

In graph-4 shown all of these inputs and outputs of four nationalized

banks of Bangladesh against to its total assets.

Graph-4: Efficiency of different banks operated in Bangladesh during

200--2008

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Efficiency (Inputs) of Banks of Bangladesh

Bank

s

No. of Employees No. of Branches Int. Exp./T.A. % Op. EXP./T.A. %

Actual

Target

Potentialimprove

(%)

Actual Target

Potentialimprove

%

Actual

(%)

Target

(%)

Potentialimprove (%)

Actual

(%)

Target

(%)

Potentialimprove

(%)

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Sonal

i

B

a

n

k

26,085 26,085

0 1,183 1,183 0 2.61 2.61 0 1.30 1.30 0

Janat

a

Ba

n

k

13,593 16,235

19.43 850 850 0 3.48 3.48 0 1.73 1.73 0

Agra

ni

B

a

n

k

13,269 13,269 0 903 903 0 2.80 2.80 0 1.82 1.82 0

Rupal

i

B

a

n

k

14,500 14,500 0 875 875 0 1.86 1.86 0 1.61 1.61 0

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In the efficiency measurement of the nationalized banks of Bangladesh, in case of inputs the potential

improvement should be negative to become most efficient bank in Bangladesh. But most of the decision making

units are unchanged. Bank should develop their position in their respective fields.

In case of outputs potential improvement should be positive. Such as interest income on total assets, spread on

total assets, net income and gross profit on total assets. All of these four outputs have a further potential

improvement which is reflected in the above tables. But there may not any scope for further improvement for all

inputs and outputs. Table in the next page shows the potential improvement of the all outputs.

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Efficiency (Outputs) of Banks of Bangladesh

Bank

s

Int. Inc./T.A. Spread/T.A. N.P./T.A. % G.P./T.A. %

Actual

(%)

Target

(%)

Potentialimprove

(%)

Actual(%)

Target

(%)

Potentialimprove

%

Actual

(%)

Target

(%)

Potentialimprove (%)

Actual

(%)

Target

(%)

Potentialimprove

(%)

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Sonal

i

B

a

n

k

5.40 6.00 11.11 2.79 3.00 25.44 0.33 0.60 81.82 3.99 4.50 12.78

Janat

a

Ba

n

k

4.85 5.25 8.25 1.36 2.00 25.00 1.19 1.50 26.05 4.35 4.55 5.50

Agra

ni

B

a

n

k

5.10 5.50 7.85 2.30 2.50 8.70 1.41 1.55 9.92 3.38 3.85 13.09

Rupal

i

B

a

n

k

4.02 4.50 11.94 2.15 2.45 13.95 0.91 1.10 20.90 2.11 2.39 13.27

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Performance Measurement of Outputs (Int. Inc./T.A.)

Performance Measurement of Outputs (Int. Inc. /T.A.)

Performance Measurement of Outputs (Spread / T.A)

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Performance Measurement of Outputs (Net Income/ T.A)

Performance Measurement of Outputs (Gross Profit/ T.A)

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Conclusion

Since Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank plays a

significant role for the financial development of our country, as a result

these banks must have efficiency for operating their all activities. TheDEA Analysis is a very effective approach to measure the efficiency of

banks (DMUs), if the assumptions are realistic and model setting is

perfect. Here in this paper, we have analyzed the case on the basis of

four specific inputs and four specific outputs only. This study may be

extended further if we include other inputs and outputs. Outputs of four

nationalized banks of operating in Bangladesh during 2007-2008 are

mostly efficient. There are several limitations remained in this study.

Firstly, we do not have access to data on price and other environment

factors. In addition, the study does not have access to panel dataavailable, making it impossible to decompose the overall efficiency into

catching-up component and the shift of production frontier.

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