Productivity and Efficiency of Commercial Banks in Sri Lanka - a Developing Country Perspective

This paper examines the relative efficiency of decision making units (DMU) in the banking industry in Sri Lanka and their recorded efficiency improvements during the last 20-year period (1989-2008). We adopt a non-parametric data envelopment analysis (DEA) method using financial and other information to estimate the productivity and efficiency. To estimate relative efficiency, this paper uses the constant return to scale (CCR) and variable return to scale (VRS) DEA models. We used three-year moving windows to construct the production frontier. The inputs and outputs variables were specified mainly relying on intermediation approach.  The estimated efficiency scores are presented using appropriate graphical and tabular forms. We found that the banks in Sri Lanka have recorded relatively higher level of efficiency. Both managerial decisions and scale of operation have been equally contributed to the recorded inefficiency. We found that large banks were relatively more efficient. However, medium size banks were recorded relatively lower levels of efficiency which were mainly contributed by the managerial factor. Key words : Data Envelopment Analysis, Efficiency, Commercial Banking, Sri Lanka For full paper: fmscresearch@sjp.ac.lk