Operations and Information Management Group
Evaluating Productive Efficiency: Comparative Study of Commercial Banks in Gulf Countries.
Financial institutes are an integral part of any modern economy. In the 1970s and 1980s, Gulf Cooperation Council (GCC) countries made significant progress in financial deepening and in building a modern financial infrastructure. This study aims to evaluate the performance (efficiency) of financial institutes (banking sector) in GCC countries. Since the selected variables include negative data for some banks and positive for others, and available evaluation methods are not helpful in this case, so we developed a Semi Oriented Radial Model (SORM) to perform this evaluation. Furthermore, since the SORM evaluation result provides a limited information for any decision maker (bankers, investors, etc...), we proposed a second stage analysis using classification and regression (C&R) method to get further results combining SORM results with other environmental data (Financial, economical and political) to set rules for the efficient banks, hence, the results will be useful for bankers in order to improve their bank performance and to the investors, maximise their results.
Mainly there are two approaches to evaluate the performance of Decision Making Units (DMUs), under each of them there are different methods with different assumptions. Parametric approach is based on the econometric regression theory and nonparametric approach is based on a mathematical linear programming theory. Under the nonparametric approaches, there are two methods: Data Envelopment Analysis (DEA) and Free Disposal Hull (FDH). While there are three methods under the parametric approach: Stochastic Frontier Analysis (SFA); Thick Frontier Analysis (TFA) and Distribution-Free Analysis (DFA).
The result shows that DEA and SFA are the most applicable methods in banking sector, but DEA is seen to be most popular between researchers. However, DEA and SFA still face many challenges, one of these challenges is how to deal with negative data, since it requires the assumption that all the input and output values are non-negative, while in many applications negative outputs could appear e.g. losses in contrast with profit. Although there are few developed Models under DEA to deal with negative data but we believe that each of them has its own limitations, therefore we developed a Semi-Orinented-Radial-Model (SORM) that could handle the negativity issue in DEA.
The application result using SORM shows that the overall performance of GCC banking is relatively high (85.6%). Although, the efficiency score is fluctuated over the study period (1998-2007) due to the second Gulf War and to the international financial crisis, but still higher than the efficiency score of their counterpart in other countries. Banks operating in Saudi Arabia seem to be the highest efficient banks followed by UAE, Omani and Bahraini banks, while banks operating in Qatar and Kuwait seem to be the lowest efficient banks; this is because these two countries were the most affected countries in the second Gulf War. Also, the result shows that there is no statistical relationship between the operating style (Islamic or Conventional) and bank efficiency. Even though there are no statistical differences due to the operational style, but Islamic banks seem to be more efficient than the Conventional banks, since on average their efficiency score is 86.33% compared to 85.38% for Conventional banks. Furthermore, the Islamic banks seem to be more affected by the political crisis (second Gulf War), whereas Conventional banks seem to be more affected by the financial crisis.
Productivity and Efficiency, GCC bank performance, Parametric Approach, Nonparametric Approach, Semi-parametric Approach.
Dr Ali Emrouznejad and Prof Emmanuel Thanassoulis
Emrouznejad, A and Anouze, A (2010) 'DEA/C&R: DEA with classification and regression tree: a case of banking efficiency', Expert Systems, 27:4, 231-246.
Emrouznejad, A; Anouze, A and Thanassoulis, E (2010) 'A semi-oriented radial measure for measuring the efficiency of decision making units with negative data, using DEA', European Journal of Operational Research, 200:1, 297-304.
Emrouznejad, A; Anouze, A and Amin, G (2010) 'On the boundedness of the SORM DEA models with negative data', European Journal of Operational Research, 206:1, 265-268.
Emrouznejad, A and Anouze, A (2009) 'A note on modelling the efficiency of top Arab banks', Expert Systems with Applications: An International Journal, 36:3, 5741-5744.
Anouze, A (2001) 'Jordanian Internal Public Loan; analytical study', Economic Horizons, 83:2, 78-89 (Arabic Language).
Anouze, A (1999) 'Job alienation and its sources: a field study in Jordanian Hospitals', Journal of Public Administration, 39:2, 343-385 (Arabic Language).
- Anouze, A and Yorke-Smith, N (2010) 'Optimal National Resource Allocation for Multi-Factor Development: Cross-Country Analysis Based on DEA', paper presented at the 24th European Conference on Operational Research (EURO XXIV), 11-14 July, Portugal.
Anouze, A and Emrouznejad, A (2007) 'Integrated DEA with C&R: A case of banking efficiency', paper presented at the 22nd European Conference on Operational Research (EURO XXII), July, Czech Republic.
Anouze, A and Emrouznejad, A (2007) 'The Productive efficiency of Jordanian banking sector', paper presented at the Tenth European workshop in efficiency and productivity analysis, 27-30 June, France.
Anouze, A and Emrouznejad, A (2006) 'DEA in the presence of negative data', paper presented at the 5th DEA International Symposium, 5-7 January, India.
Anouze, A and Emrouznejad, A (2006) 'Efficiency analysis of Islamic banks: A case of Gulf Cooperation Council (GCC)', paper presented at the OR48 Annual Conference, 11-13 September, United Kingdom.