Efficiency and Productivity of Commercial Banks in Nepal: A Malmquist Index Approach

Abstract

This study investigates the change in efficiency and productivity of banking industry during the period of 2007/08 to 2011/12 and analyzes the effects of various indicators on the efficiency of the twenty two commercial banks in Nepal. Malmquist Index is used as to measure the efficiency and productivity where as Tobit regression is used as to analyze the determinants of efficiency. Overall, the results show that the productivity change of commercial banks in Nepal has improved over the sample period and that the increase in productivity change in Nepalese commercial banks is due to the technical progress rather than efficiency components. It also reports that the decline in efficiency change is due to decline in both pure efficiency change and scale efficiency change. The Tobit regression model found positive relationship between debt to equity ratio and efficiency as well as between capital adequacy and efficiency. Further, profitable banks with lower leverage and higher capital adequacy ratio are found to be more efficient and bank loans seem to be more highly valued than alternative bank outputs i.e., investments and securities.