Office of Research and Publications (ORP) American International University-Bangladesh (AIUB)
Working Paper No. AIUB-BUS-ECON-2009-01
A A Rushdi (2009). Performance Measure for the Commercial Banks in Bangladesh: An Application of Total Factor Productivity. AIUB Bus Econ Working Paper Series, No 2009-01, http://orp.aiub.edu/WorkingPaper/WorkingPaper.aspx?year=2009
Copyright © 2009 American International University-Bangladesh (AIUB)
The performance evaluation of business has taken high profile in the climate of micro-economic reform in the recent past. The real wealth of Bangladesh can be increased by increasing the inputs available to the country. That is by discovering new resources and using the existing resources more efficiently. Efficiency gains in the banking sector of the country will make the country domestically and internationally more competitive and capable of generating more income and employment opportunities in the country. An adequate assessment of efficiency gains requires a range of financial, operational and economic indicators to be applied including Partial Factor Productivity (PFP) and Total Factor Productivity (TFP). Productivity growth is considered to be the best way to measure international competitiveness and economic growth. Estimates of TFP measures will provide rates of growth in the productive efficiency of labour and capital. Relative growth rates will suggest whether TFP growth was predominantly biased towards saving labour or saving capital and other inputs. To date there has not been any serious study on TFP in the Banking sector of Bangladesh. The present study is an attempt to bridge this gap.
1.2 Plan of the study
Section two of the paper divides the performance indicators under three broad headings and discusses advantages and disadvantages of each of the three categories. Section three provides a bird’s ’s eye view of the banking sector in Bangladesh and section four presents PFP and TFP estimates for two of the commercial banks in Bangladesh. Finally, section five provides the summary and conclusions of the study.
Advantages and disadvantages of various performance measures
This section considers merits and demerits of various performance indicators under three broad classifications: accounting measures, non-financial measures and economic measures. No business enterprise in Bangladesh publishes any performance indicators other than accounting measures.
2.1 Accounting Measures
Accounting measures include rates of returns on assets (ROA), rates of returns of shareholders fund (ROE), ratio of profit to sales and ratio of profit to costs. The main attraction of these measures is that it can be calculated from readily available information and can be readily compared with other public or private enterprises. Accounting measures are also easily understood by shareholders and other interested parties. However, accounting measures may not be comparable because of differences in accountings conventions and asset valuation methods. Effects of inflation on asset prices and technological obsolesces are ignored in accounting measures. These measures do not reflect economies and diseconomies of scale and do not signal economic efficiency. Accounting profitability can be improved by increasing prices without improving efficiency. High profitability and inefficiency can co-exist when accounting measures are used as performance indicators. For policy makers and for the managers to take appropriate decisions, performance indicators should be able to answer the following questions among others: • • • • How efficiently were the resources used? Was the profit resulted from market power? How comparable are the rates of profit over time and between companies? Does higher profitability represent higher...