Technical efficiency gap between bank of ceylon and commercial bank in Sri Lanka: A data envelopment analysis

Abstract

Introduction Data Envelopment Analysis (DEA) is a non-parametric technique for measuring the relative efficiency of a set of similar units, usually referred to as decision-making units (DMUs). It was initially used to assess the relative efficiency of not-for-profit organizations. However, gradually its application has been extended to cover for-profit organizations as well. Its first application in banking industry appeared with the work of Sherman and Gold (1985). The technical efficiency relates to the productivity of inputs (Sathye, 2001). A bank is said to be technically inefficient if it operates below the frontier. A measure of technical efficiency under the assumption of Constant Returns-to-Scale (CRS) is known as Overall Technical Efficiency (OTE). In Sri Lanka, variables such as operational risk, inflation and market capitalization had a positive effect on Technical Efficiency (TE) in asset transformation of banks (Seelanatha, 2012). Fernando et al (2014) found that mean technical efficiency score of the Sri Lankan banking industry was 83 percent and the highest efficiency was recorded in the year 2011. However, none of the empirical studies in the existing literature have considered the efficiency gap between Bank of Ceylon and Commercial Bank in Sri Lanka. The Bank of Ceylon (BOC) and Commercial Bank are famous commercial banks in Sri Lanka. The Bank of Ceylon is a government bank but Commercial Bank is a private bank in Sri Lanka. By measuring the level of technical efficiency, this study compares the technical efficiency of the both banks.