Evaluating Total Factor Productivity Growth of Commercial Banks in Sri Lanka: An Application of Malmquist Index

Abstract

This study focuses on total factor productivity growth and its decomposition of commercial banks in Sri Lanka. For this purpose, two state banks , Bank of Ceylon and Peoples’ bank and four private banks,  namely, Commercial bank, Seylan bank, Hatton National Bank and Sampath  were selected over the period 2009- 2012.   By using Data envelopment analysis (DEA) total factor productivity and its components were measured in terms of efficiency change, technical efficiency change, pure efficiency change and scale change.  The data related to interest income and amount of loans which were considered as two outputs and amount of deposits, total assets, number of staff and interest expenses considered as four inputs were collected from annual reports of Colombo Stock Exchange (CSE) in Sri Lanka and  were analyzed on the assumption of output oriented method with constant returns to scale. It was found that, all six banks operate averagely at 87.2 percent of overall efficiency and it reveals the less performance of the banks. This less performance was achieved due to the less progress in technical change than efficiency change and the finding highlights that technical change has been the main constraint to achieve a high level of total factor productivity of commercial banks in Sri Lanka. Among the private banks, Seylan bank has the highest efficiency of 1.033 than other banks and among the state banks, Peoples’ bank have the values of 0.773than Bank of Ceylon. The overall results concluded that comparatively selected private banks are more efficient than state banks in the study period in Sri Lanka.