Management Science Letters

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1 Manageent Science Letter 4 (2014) Content lit available at GrowingScience Manageent Science Letter hoepage: Bank branch operating efficiency: evaluation with data envelopent analyi Roozbeh Talebi Zarinkaar a* and Akbar Ala-Tabriz b a Departent of Manageent, Erhad Daavand Intitute of Higher Education, Tehran, Iran b Departent of Manageent,, Shahid Behehti Univerity, Tehran, Iran C H R O N I C L E A B S T R A C T Article hitory: Received January 20, 2014 Accepted 30 Augut 2014 Available online Septeber DEA Data envelopent analyi Efficiency Banking indutry Meauring the relative efficiency of iilar unit ha been a popular reearch epecially when the unit were otly non-financial. Even, iilar financial unit ay not be necearily evaluated baed on traditional financial figure uch a return of equitie, return of aet, etc. In thi paper, we preent an epirical invetigation to eaure the relative efficiency of 30 branche of an Iranian bank naed Bank Mellat. The tudy conider four input including operating expene, interet paid, capital expenditure and fixed aet. In addition, we ue cutoer bank depoit, coiion and loan paid a output paraeter. Uing three different data envelopent analye, the tudy eaure the relative efficiencie of all unit. The preliinary reult indicate that ot bank were working under deirable level of efficiency Growing Science Ltd. All right reerved. 1. Introduction Studying the relative efficiency i one of the concern in any financial copanie uch a inurance, bank, etc. (Soltanifar & Farhadi, 2014) Data envelopent analyi (DEA) ha been one of the popular technique for eauring the relative efficiency of iilar unit uch a bank unite, chool, etc. The advantage of uing DEA i that one ay eaily ue the non-financial factor along with the financial nuber to caculate a uitable coparion of different unit. DEA ha becoe a popular technique becaue of iple application and interpretation (Charne et al., 1978; Banker et al., 1984). During the pat three decade, there have been any application of DEA ethod for calculating the relative efficiency of bank (Hale et al., 1999; Mercan et al., 2003; Fallah et al., 2011). Yang et al. (2010) preented an integrated bank perforance aeent and anageent planning by hybrid iniax reference point DEA approach. Staub et al. (2010) invetigated different factor ipacting the relative efficiency of Brazilian bank uch a cot and technical efficiencie. They reported that Brazilian bank had everly uffered fro low level of efficiency copared with European or North Aerican bank. They reported that tate-owned bank were ore cot efficient than other foreign unit. Nonethele, they did not give any indication to clai that the difference in econoic efficiency were becaue of the kind of activity and bank ize. *Correponding author. E-ail addree: roozbeh.talebi1988@gail.co (R. Talebi Zarinkaar) 2014 Growing Science Ltd. All right reerved. doi: /j.l

2 2308 Avkiran (2010) invetigated the relationhip between the upper-efficiency etiation and oe ajor key financial ratio for Chinee banking ector. The technique provided oe opportunity to deterine the inefficient unit where there wa a low correlation between the upper-efficiency and good financial ratio. Lin et al. (2009) applied variou DEA odel for 117 branche of a certain bank in Taiwan and reported an overall technical efficiency of 54.8 percent for all bank. They alo explained that ot branche had been relatively inefficient. Thoraneenitiyan and Avkiran (2009) invetigated DEA and tochatic frontier analyi (SFA) to eaure the ipact of retructuring and country-pecific factor on the efficiency of pot-crii eat Aian banking yte. They tated that banking yte inefficiencie were priarlity due to country-pecific condition, uch a high interet rate, concentrated arket and econoic developent. DEA wa alo ipleented for banking deciion. For exaple, Che et al. (2010) applied a cobination of Fuzzy analytical hierarchy procedure (AHP) and DEA a a deciion aking facility for aking bank loan deciion. 2. The propoed tudy The contant return to cale DEA (CCR) wa initially propoed by Charne, et al. (1978, 1994) a a atheatical technique for eauring the relative efficiency of deciion aking unit (DMU). One can eaily find out how a given DMU work whenever a production function i available. ax Z ubject to r1 v x u y, 0 r r0 r1 i i0 1 (1) u y v x 0 r r0 i i0 r 1 r 1 ( r 1,, ),( i 1,, ),( j 1,, n), u, v 0 r i where x and y repreent the input and output vector, repectively. In addition, u and v are dual variable aociated with input/output, repectively. The CCR production feaibility et border deterine the relative efficiency in which any off-border DMU i conidered a inefficient. The CCR odel can be detected in two for of either input or output oriented. The input CCR ai to decreae the axiu input level and can be repreented a follow, ax Z u y W 0 r r0 r1 ubject to r 1 v x i i0 1 u y x v W 0 r r1 ij i r 1 i 1 ( r 1,, ),( i 1,, ),( j 1,, n), u, v 0 r i The difference between Model (1) and Model (2) i aociated with the free variable, W. When W>0 The return to cale i in the for in deceaing, when W=0 we have a contant return to cale odel and finally when W<0, the return i to cale in increaing for. Finally, Model (3) deontrate the axin odel a follow, (2) ax Z0 M ubject to r 1 v x i i0 1 u y x v d 0 r rj ij i j r 1 i1 M d j 0 ( r 1,, ),( i 1,, ),( j 1,, n), u, v, d 0 r i j (3)

3 R. Talebi Zarinkaar and A. Ala-Tabriz / Manageent Science Letter 4 (2014) 2309 where M repreent the deviation fro the deirable value. One of the iue aociated with DEA odel i that we ay receive ore than one efficient unit and to rank the efficient unit, Anderon Peteron odel can be ue. 3. Cae tudy In thi paper, we ue the propoed odel explained in the previou ection to eaure the relative efficiency of 30 Iranian bank naed Bank Mellat located in city of Tehran, Iran. The propoed DEA odel of thi paper conider 4 input including operating expene, interet paid, capital expenditure and fixed aet. In addition, we ue cutoer bank depoit, coiion and loan paid a output paraeter. Table 1 deontrate the reult of eauring the relative efficiency of 30 unit baed on the ipleentation of odel 1 and odel 2. Table 1 The uary of the reult of CCR and BCC odel introduced in Model (1) and Model (2) Unit CCR BCC Unit CCR BCC A we can oberve fro the reult of Table 1, ot unit are repreented a efficient one and the reult oewhat confue deciion aker. Therefore, we ue Model (3) to eaure the efficiency of variou unit. Table 3 uarize the reult of our urvey. Table 3 The uary of eauring the relative efficiency of 30 unit baed on inax odel Unit MinMax odel Unit MinMax odel According to the reult of Table 3, only one unit, unit 18, i conidered to be efficient and the other unit are tated a inefficient. The average efficiencie of odel 1, 2 and 3 are 0.87, 0.95 and 0.53,

4 2310 repectively. In order to have a better inight on the relative efficiency of efficient a well a inefficient unit and coparing with the reult of axin ethod we apply Anderon Peteron ethod (Anderen & Peteren 1993) and Table 4 uarize the reult of our invetigation. Table 4 The uary of Anderon Peteron ethod for eauring uper efficiency Efficiency Anderon Peteron Rank Unit CCR BCC MinMax CCR BCC CCR BCC MinMax A we can oberve fro the reult of Table 4, Anderon Peteron ethod (Anderen & Peteren, 1993; Anderon et al., 2011) yield the ae reult a the axin ethod. 4. Dicuion and Concluion In thi paper, we have preented an epirical invetigation to tudy the perforance of elected bank in city of Tehran, Iran. The propoed tudy ha conidered 4 input including operating expene, interet paid, capital expenditure and fixed aet. In addition, the tudy ha ued cutoer bank depoit, coiion and loan paid a output paraeter. Uing different DEA technique, the tudy ha eaured the relative efficiency of variou 30 branche. The reult have indicated that ot bank were operating well above the average. In addition, the ipleentation of inax ethod ha appeared to preent better reult in ter of uper efficiency. The reult of ipleentation of DEA technique have been repeatedly ued in other application. Ehani and Danaei (2014) applied a cobination of DEA and Technique for Order of Preference by Siilarity to Ideal Solution (TOPSIS) for ranking bank. In their urvey, they firt ued CCR ethod to rank all different bank and then ued TOPSIS technique to rank efficieny unit. Shabani and Sha (2014) eaured the perforance of accepted invetent copanie in Tehran tock exchange by value efficiency analyi, which i an extenion of data envelopent analyi. Rahiian and Soltanifar

5 R. Talebi Zarinkaar and A. Ala-Tabriz / Manageent Science Letter 4 (2014) 2311 (2013) preented an application of DEA baed Malquit productivity index in univerity perforance analyi. Acknowledgeent The author would like to thank the anonyou referee for contructive coent on earlier verion of thi paper. Reference Anderen, P., & Peteren, N. C. (1993). A procedure for ranking efficient unit in data envelopent analyi. Manageent cience, 39(10), Anderon, D., Sweeney, D., Willia, T., Ca, J., & Martin, R. (2011). An Introduction to Manageent Science: Quantitative Approache to Deciion Making, Revied. Cengage Learning. Avkiran, N. K. (2010). Aociation of DEA uper-efficiency etiate with financial ratio: Invetingating the cae for Chinee bank. Oega, 39(3), Banker, R. D., Charne, A., & Cooper, W. W. (1984). Soe odel for etiating technical and cale inefficiencie in data envelopent analyi. Manageent Science, 30(9), Charne A, Cooper, W. W., & Rhode, E. (1978). Meauring the efficiency of deciion aking unit. European Journal of the Operational Reearch, 2, Charne A, Cooper W. W., Lewin, A., & Seiford, L. M. (1994). Data envelopent analyi: theory, ethodology and application. Maachuett: Kluwer Acadeic Publiher. Che, Z. H., Wang, H. S., & Chuang, Ch-L. (2010). A fuzzy AHP and DEA approach for aking bank loan deciion for all and ediu enterprie in Taiwan, Expert Syte with Application, 37(10), Ehani, M., & Danaei, A. (2014). A DEA-TOPSIS approach for ranking credit intitution. Manageent Science Letter, 4(9), Fallah, M. Aryanezhad, M.B., Najafi, S.E., & Shahavaripour, N. (2011). An epirical tudy on eauring the relative efficiency uing DEA ethod: A cae tudy of bank indutry. Manageent Science Letter, 1(1), Fu, X. M., & Heffernan, S. (2007). Cot X-efficiency in China' banking ector. China Econoic Review, 18(1), Hale, J. A., Scheraga, C. A., & Bedingfield, J. P. (1999). DEA efficiency profile of U.S. bank operating internationally. International Review of Econoic & Finance, 8(2), Hwang, C. L., & Yoon, K. (1981). Multiple Attribute Deciion Making Method and Application. Springer, Berlin Heidelberg. Lin, T. T., Lee, Ch-Ch., & Chiu, T-F. (2009). Application of DEA in analyzing a bank' operating perforance. Expert Syte with Application, 36(5), Mercan, M., Reian, A., Yolalan, R., & Burak Eel, A. (2003). The effect of cale and ode of ownerhip on the financial perforance of the Turkih banking ector: reult of a DEA-baed analyi, Socio-Econoic Planning Science, 37(3), Meter, L. J. (1996). A tudy of bank efficiency taking into account rik-preference. Journal of Banking & Finance, 20(6), Rahiian, M & Soltanifar, M. (2013). An application of DEA baed Malquit productivity index in univerity perforance analyi. Manageent Science Letter, 3(1), Shabani, M & Sha, N. (2014). Meauring the perforance of accepted invetent copanie in Tehran tock exchange by value efficiency analyi. Manageent Science Letter, 4(6), Soltanifar, M & Farhadi, F. (2014). An application of data envelopent analyi for eauring the relative efficiency in banking indutry. Manageent Science Letter, 4(5), Srairi, S. A. (2010). Cot and profit efficiency of conventional and Ilaic bank in GCC countrie. Journal of Productivity Analyi, 34(1),

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