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The Efficiency Of Consumer Banks In Pakistan Finance Essay

This paper covers the variables that have effect on the productivity of retail function of a bank. It uncovers some variables that can be handled for effective strategy for increased productivity. These variables mainly can add success to the bank as they will help bank to improve a lot. Technology, Diversification, Organizational Restructuring, Access Points, Security are the main variables that have been covered for broader picture of efficiency and efficacy of a consumer or retail banking with respect to Pakistani Banking Industry.



First part of the topic is efficiency. Efficiency in broader term is a measure of productivity. It can be calculated as ratio of output and input. There are two generic factors that affect the efficiency. Either you can change input or you can change output for change in efficiency.

Efficiency is directly linked to output. If you decrease output efficiency is decreased. Similarly, if to increase efficiency output should be increased. On the other hand efficiency has inverse relation to the input. If you increase input efficiency decreases. You have to control the input for increase in efficiency.


The second part is efficacy. It is used as a synonym of efficiency. According to American Collegiate Dictionary Merriam Webster efficacy means “power to produce an effect”.

On a broader perspective and just for understanding the concept and definition we can take power as an input and effect as an output. The input required to produce an output is purely what efficiency is.

Consumer Banking

Third part is consumer banking. It is also known as retail banking. The other types are corporate and investment banking. The main task for a consume bank is to conduct transactions with customers. The major tools or products of consumer banking are as follows:


Transactions account

Personal loan

Debit and credit cards

Mortgages etc

Efficiency of Retail Bank

To combine all three we can narrow down are topic. We will be using efficiency and efficacy as one part. The scope of our research is efficiency of a retail bank. For the paper it can be defined as follows:

“The output input ratio of banks that deals with consumer banking products”

Background of the Problem

Retail Banks or consumer banks are major source of financing public. The more the efficiency is the better economy would be. The research would uncover the problems and strengths of banking of Pakistan. The factors influencing the efficiency of banks at world level would be tested in the case of Pakistan.

Theoretical Framework

Variables that will be tested for the efficiency have been extracted from the literature considered for research. Framework indicates the central dependent variable efficiency and the method which will be used for gauging it. The outer circle comprises of the variables that bring large impact on the center variable. The outermost are the indicators used for measurement of the variables.

Figure 1: Theoretical frameworkTheoretical Framework is the framework of variables which will be influencing efficiency of banks around the world. These variables have been devised to provide solutions to the banking system to gauge their problems and improve them. The framework is as follows:

Significance of the Study

This research will enable and provide platform for development of banks. The variables indicated and extracted from world level will be applied at Pakistan Banking System. These variables would be very important while evaluating and monitoring efficiency of banks.

Research Objective

To determine the factors affecting efficiency

Whether efficiency and efficacy is influenced by foreign ownership or not

To determine a scale to gauge efficiency

To determine the role of technology in efficiency considerations

List of Variables

The variables used in the paper are as follows:



Operational Definition



Customer Base

(Fader & Hardie, 2009)

It can be defined as the allocation of the total spends per customer.

Number of visits

How often do you visit Bank for transactions?


(Labonte & Schrecker, 2006)

It can be defined as the interdependence and connection of nations across their borders for political, economic, social or cultural reason.

Comparison of local and foreign banks

Do you think foreign banks are better option than local banks?

Access Points

(McCormick, Edson, & Natesan, 2007)

It can be defined as number of places from where banks can be accessed

Number of Banking options

Do you think with the increase in contact places (ATM, Internet and Increased Branches) banks have become more productive?


(Xue, Hitt, & Harker, 2007)

It is the increase in number of products offered by Banks

Number of Products offered by Banks

Do you think by increasing the range of services (ATM, bank assurance and other services) banks has potential to attract more customers?

Technological Change

(Xue, 2002)

Introduction of technically and scientifically new products is termed as technological change.

Introduction of advanced banking methods

How would you rate the increase in technology banks are getting out of the reach of customers?

Organizational Restructuring

(Kirkwood & Nahm, 2006)

The change in the structure of banks due to some systematic or non-systematic reasons

Mergers & Acquisition

In what way Mergers and Acquisition change the banking performance?


(McCormick, Edson, & Natesan, 2007)

Excellence is the measure of efficiency

Overall rating of services

How do you rate the services of your preferred bank

Dependent and Independent variables

Efficiency is a quantitative measure of productivity of any organization. To convert it to the qualitative figure (McCormick, Edson, & Natesan, 2007) suggests it to be measured by excellence. Excellence is not only excellence in operations but it is referred to as excellence in overall banking operations.

Another advantage of using excellence is it will account for all factors that will be influencing productivity. It will not only account for Financial but non-financial measures for performance.

Independent variables used in the research will be customer base, globalization, access points, diversification, technological change and organizational restructuring. These variables have been discussed previously in detail and in the next chapter.

Relationships between variables

All the variables discussed previously have positive relationship with excellence. These variables are directly proportional to the efficiency. Further these relationships are mentioned in the table below.



Customer Base




Access Points




Technological Change


Organizational Restructuring




Consumer Base has statistically insignificant effect on efficiency.


Consumer Base has statistically significant effect on efficiency.


Globalization has statistically insignificant effect on efficiency.


Globalization has statistically significant effect on efficiency.


Access Points has statistically insignificant effect on efficiency.


Access Points has statistically significant effect on efficiency.


Diversification has statistically insignificant effect on efficiency.


Diversification has statistically significant effect on efficiency.


Technological Change has statistically insignificant effect on efficiency.


Technological Change has statistically significant effect on efficiency.


Organizational Restructuring has statistically insignificant effect on efficiency.


Organizational Restructuring has statistically significant effect on efficiency.


Retail banking is facing multiple challenges. These challenges have been categorized in 5 different sources. Security, Decrease cost, Mergers and acquisitions, Regulatory compliance and Revenue growth. (McCormick, Edson, & Natesan, 2007) These variables are also linked to efficacy and efficiency of a service sector. They have also argued that with the increase in access points efficiency is being affected and security concerns have been increased to a greater extent.

The basic reason behind this point is customer identity is anonymous at these new access points. The anonymity is responsible for increasing crimes and fraudulent which is the major security concern. Novell provides hardware and software management system which helps to increase efficiency in retail banking sector. Manual processes leads to increasing cost of compliance and further leads to regulatory and compliance violence and corporate reputation risk. (McCormick, Edson, & Natesan, 2007)

As a measure of efficiency revenue growth can be measured as function of excellence. Merger and acquisition is the crisis situation which impacts the retail bank sector from recovering losses for 3 months average taken from Retail Banking Technology Trends survey Dec.2006. Novell has developed a system which is concerned towards operational excellence as well as regulatory compliance and security as a function of Retail Bank efficiency.

In the majority of countries having transition economy, foreign capital has increasing share and is responsible for controlling banking sector (Weill, 2003). This research is based on comparative analysis of efficiency of foreign owned and domestic owned banks. Furthermore (Weill, 2003) has concluded that efficiency of foreign banks is much higher as compared to that of local owned or domestic banks.

Parametric approaches, such as the stochastic frontier approach, use econometric tools to estimate the efficiency frontier have been used for the study as it provides room for random errors.

Few of variables used in (Weill, 2003) are Personnel and interest expenses; Price of labor, Investment assets etc. There is a positive influence of foreign ownership on cost efficiency in transition countries (Weill, 2003). The reason behind it is that foreign banks have better know how of the working and better corporate governance. This research has left a room for further study on origin of advantages of a foreign owned bank.

(OKEAHALAM, 2008) has argued that internationalization increases competition in the banking sector and effects efficiency. However a study has been conducted showing larger but inefficient banks of Namibia and smaller yet efficient banks of Tanzania. Policy makers should ensure that entrants have high quality management and will transfer technology and skills. This finding is consistent with entry and behavior based primarily on the desire to transfer a monopoly structure and derive economic rents. (OKEAHALAM, 2008)

Whenever we try to compare the business loans made by the banks, we come across some aspects which seem to be the same across all the banks. This type of comparison is termed by bankers as the nominal comparison. This is because the real bases of comparison have not yet been defined and it is the focus upon common points between banks which matters a lot for banks.

The aspects which come under the umbrella of nominal comparison mostly comprise the state bank rules, the ceilings, the floors and other regulations levied by the state banks. These also comprise the norms and common practices of the entire banking industry. Some of those common practices are as follows:

In order to secure their positions as creditors and in order to establish long term relationships with the customers, all commercial banks base their loan strategies upon the five c’s of credit extension.

All banks also try to check the CIB report in order to get complete information about the character of the candidate. The CIB report is meant to inform the bank about the credit relationship of the candidate with the other banks. In case of severe doubts upon the candidate, the bank becomes aware of the potential deviations in the character of the candidate in the future.

All banks try to perform a complete market analysis in order to judge the complete creditworthiness of the candidate. This market analysis is a type of investigation which is performed by contacting the suppliers and the customers of the business candidate. Market analysis provides a real clue to the banker about the candidate and it also helps the banker to get to know about the facts between the lines. Banks prefer the market analysis even more than the financial statements of the candidate. Banks also check the credibility of the source of investigation i.e. the customer or the supplier of the candidate before issuing a final verdict about the candidate.

All banks base their returns upon Karachi Inter Bank Borrowing Rate (KIBOR). This anchoring of rates serves as a benchmark for all the banks.

All banks charge approximately 4 to 5% above the KIBOR rate. The exact percentage depends upon the type of the customer or candidate. In case of a customer, the banks can even go below 4% and can offer a 3% premium to him. This only happens in rare cases when the bank wants to establish long term relationship.

All banks have to follow a markup floor and a markup ceiling which has been assigned by the state bank. Although such floors and ceilings exist but there is a lot of flexibility in their application.

All banks have to follow a capitalization ceiling before extending a loan. This ceiling has been assigned by the state bank to make sure that the bank does not put all its eggs in one basket.

All banks pay a loan of value between 60 to 70% of the mortgage value. The real percentage again depends upon the type of the customer. A prime customer can be offered a 70% loan.

All banks take into account the economic impacts upon an industry. They rely a lot upon forecasting in order to diversify their portfolio. They prefer investing in risk free industries and try to avoid risky ones. This diversification depends upon the type of business of a certain city or town because a bank is created to serve its surroundings.

Key finding from the study of Namibia and Tanzania is that lack of competition has made efficiency vulnerable. Another unusual thing can be concluded that foreign entry essentially does not make markets more competitive or efficient. Market only becomes competitive when it is already concentrated with local or foreign banks.

Another paper provides following points:

The commercial banking industry is operating in an oligopolistic environment. All banks charge and receive similar markups. The only difference lies in the name of the products. The core offering is more or less the same.

Despite of the ongoing recessionary phase in the economy and poor political power phase in the country, most of the commercial banks have been able to increase their margins. This can be evident from the fact that not only the interest margins but also the non interest margins have seen a sky high rise since 2009.

Standard Chartered’s products are well designed and well marketed too. Its offering suits everyone and that is the reason probably why it seems to be the best performer.

JS is a new entrant. Banks are aimed at serving their nearby area and therefore design their products according to the needs of the nearby area. JS does not offer any service needed in the rural area despite of the fact that it has its existence over there.

Most of the banks enjoy a very high leverage. We can say that banks are highly leveraged institutions. JS bank relies less on leverage because it is currently operating with a chairman who has invested a lot in it.

Holistically speaking, Pakistan seems to be a good place for bank where many new banks can come and earn good money because of the high potential in the Pakistani market.

Alternatives to commercial banking can also earn good money as there seems to be no alternatives currently available.

Another article discusses that customer efficiency increases with greater self-service utilization. In case of self-service input cost of retail bank is decreased. This issue exactly mirrors the concern in the firm productivity literature that focuses on methods for “explaining” multifactor productivity of firms given that it is also measured as a residual concept. (Xue, Hitt, & Harker, Customer Efficiency, Channel Usage, and Firm Performance in Retail Banking, 2007).

Possible explanations for the differing efficiency scores for the majors and regional banks are diversification, technological change, organizational restructuring, different customer bases, and the effects of the globalization of financial services (KIRKWOOD & NAHM, 2006).

This study further concluded that efficiency of major banks is increasing. Their productivity has also increased a lot whereas regional banks are in danger their efficiency is decreasing and profits are shrinking. This decreased productivity is directly proportional to banking efficiency in Australian banks. This trend can be used in my study to gauge the tangible factors and their effect in Pakistani Market. This study is the first to focus on output side inefficiency along with input side inefficiency in Turkish banking, using the so-called stochastic frontier approach.

The approach behind using it is that Profit is the key while bank is making losses with less or even same input. Profits are the outlook and are punished even when input becomes costly. On evaluating Turkish banks by both criteria Turkish banks becomes efficient while evaluating by profit efficiency methods.

Few of variables used in (Weill, 2003) are Personnel and interest expenses; Price of labor, Investment assets etc. There is a positive influence of foreign ownership on cost efficiency in transition countries (Weill, 2003). The reason behind it is that foreign banks have better know how of the working and better corporate governance. This research has left a room for further study on origin of advantages of a foreign owned bank.

Another research of Xue related to customer efficiency show that self-service through the Internet has a significant migration effect on personal service and, consequently, saves service delivery costs and improves customer efficiency. Xue has argued that unlike conventional thinkers no research has indicated that customer relationships are damaged as self-service is increasing in service industry. Thus Internet or Virtual Banking services are adding on value to the efficacy and productivity of retail banking services. (Xue, Customer efficiency, 2002)

ATM’s, Debit Cards, Credit cards, Online Cheque writing facilities, Pay Orders, Demand drafts, Online Banking and all the possible technologically advanced instruments effect the preferences of consumer in selection of a service provider bank. Therefore output relies on customer base which is element of efficacy. Concluding remarks can be technology change has direct relation to banking efficiency.

After reading all articles it can be concluded that efficiency is very broad term and handling all variables will make research complex. Therefore to get more accurate result it is necessary to shortlist few variables.

(NEAL, 2004) has used ROA (Return on Asset) as a measure of efficiency for measuring it from 1995-1999 in Australian Banking case. He has used product of net margin and asset utilization to gauge this variable. The data shows better results for national banks as compared to regional ones. This research is Australia based and focuses on national and regional bank. However corporate and consumer banking has not been separated. The variable ROA in fact can be used for both retail as well as corporate banking.

(Hassan & Isik, 2002) mentions that previously cost efficiency or input saving efficiency were used to measure the efficiency of banks in Turkish researches. This study is the first to focus on output side inefficiency along with input side inefficiency in Turkish banking, using the so-called stochastic frontier approach. The approach behind using it is that Profit is the key while bank is making losses with less or even same input. Profits are the outlook and are punished even when input becomes costly. On evaluating Turkish banks by both criteria Turkish banks becomes efficient while evaluating by profit efficiency methods.

Research Methodology

Details of the population and how it will be identified

Population includes people from which sample is drawn. These are people with similar characteristics. To gauge the banking efficiency of consumer banking people with adequate knowledge of banking and who are involved in banking transactions on frequent basis. This includes people who maintain good volume of transactions in the Pakistani retail bank.

The population used in the research will be tangible and the characteristics on which population would be extracted would be more demographics. This population is derived from super population of bank clients.

Sampling frame

Sampling frame is the device used for drawing a sample. Ideally sampling frame should have a rational and quantitative identifier, the units drawn should be available and accessible. The frame should be logical and formulated on the scientific grounds. Furthermore the entire characteristics that are under study should be present in the frame.

The sampling frame constituted the bank clients residing in the area of Lahore Cantonment, Defence and Gulberg area.

The reason behind selecting these areas is that they are posh areas of Lahore. People living here can maintain bank balances with adequate turnover as compared to people living in backward areas of Lahore.

However people residing in area are also wealthy but banking institution is less frequently or not used by them as indicated by many researchers on the particular field.

Sampling procedure and size of sample

The research will be using Quota sampling for drawing a sample for sixty people. In this type of sampling technique quota is assigned to each bank and twenty questionnaires will be distributed in each of three banks. This technique will help in eliminating a sample bias.

Data collection procedure

I will be using primary as well as secondary sources of information. For defining and extracting variables secondary data is quite useful. The journals, news articles and blogs have been accessed for finding these variables and studying their effect on efficiency of retail banking sector.

Primary data will be used for evaluating the variables on the basis of customer’s judgment. This will help quantifying the qualitative nature of the data. This data will not only include customers opinion from questionnaire but also from the interviews that will be conducted to counter check the data gathered.

This data will be analyzed with the help of bar charts and pie charts. After analyzing this way I will be using statsgraphics for regression analysis. This will help in determining the data and finding the relations between variables. Ordinary Least Square technique of multiple regression will be used for finding the relation of dependent and independent variables. At the end hypothesis will be rejected or not rejected on the basis of statistical measures of coefficient of determination (R2), f statistical technique and t statistical tests.


Multiple Regression Analysis

Dependent Variable: Excellence



Standard Error

T Statistic







Access Points





Customer Base















Organizational Re





Technological Cha





Analysis of Variance


Sum of Squares


Mean Square























Total (Corr.) 26.7333 59

R-squared = 82.2588 percent

R-squared (adjusted for d.f.) = 80.2504 percent

Standard Error of Est. = 0.299144

Mean absolute error = 0.163648

Durbin-Watson statistic = 2.02481

The StatAdvisor


The Multiple Regression and ANOA table results confirm to fit in a multiple linear regression model and the relationship between Excellence and 6 independent variables. The equation of the fitted model is

Excellence = -15.109 + 0.718403*Access Points + 0.753735*Customer Base + 0.950487*Diversification + 0.296294*Globalization + 0.403815*Organizational Restructuring + 0.884216*Technological Change

We are testing the relationship at the level of significance of 5% or the confidence level of 95% and at the specified level we can say that the variables used for the study have statistically significant relationship because P-value in the ANOVA table is less than 0.01.

82.2588% of variation is done because of the variables mentioned and the remaining 37.75% variation is due to other factors. One of the more suitable statistic for comparing the model with different numbers of independent of variables known as adjusted R-squared statistic comes out to be 80.2504%. The standard error of the estimate shows the standard deviation of the residuals to be 0.299144. This value can be used to construct prediction limits for new observations by selecting the Reports option from the text menu. The mean absolute error (MAE) of 0.163648 is the average value of the residuals. The Durbin-Watson (DW) statistic tests the residuals to determine if there is any significant correlation based on the order in which they occur in your data file. Since the DW value is greater than 1.4, there is probably not any serious autocorrelation in the residuals.

In determining whether the model can be simplified, notice that the highest P-value on the independent variables is 0.0000, belonging to Access Points. Since the P-value is less than 0.1, the highest order term is statistically significant at the 99% confidence level. Consequently, you probably don't want to remove any variables from the model.


Our results show that there is a statistically significant relationship between excellence and access points, customer base, diversification, organizational restructuring, Globalization and Technological change. Any change in these variables leads to a change in productivity of a bank by bringing it out from the competition.

Recent example of UBL Omni Dukan and UBL Silah Milah shows that diversification and technological change adds a lot in banking productivity. Similarly MCB Bank Limited is a top bank of Pakistan in terms of productivity. It has huge number of branches which is the increased number of access points and is operating globally also. Therefore it is one of the productive banks.

The banks which are unable to perform are either acquired or merged with the banks that are performing well and therefore they get good management and operation skills therefore their productivity is enhanced to a greater extent. As in case of Pakistan Many foreign banks have been acquired by other banks. Recent example of RBS and faysal bank proves the above point.

All the banks burn midnight oil to increase the customer base but only successful banks who have strategic fit and synergy in their operations are able to increase the customer base. It is used as the direct measure of output.

Concluding we can say that the variables significantly affect excellence.


Banks should increase their branches, off branch services including branchless banking, ATM services, credit and debit card acceptance and others through which customer find more ways to interact with the bank.

Banks should start diversifying their operations like they should provide insurance, brokerage services etc. They should also provide investment consultations to the customers.

Banks should go globally because in Pakistani market there is more monopolistic competition as indicated by a research of SBP.

Technological advances should be promoted by banks because these advances will keep them above the competition. There are still branches of banks that cannot do online banking. The system remains down at least once in a month or so.

Banks should change their management structure and find more successful strategies.

The ultimate focus should be customer satisfaction.

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