A COMPARISON OF EFFICIENCY IN PRIVATE AND GOVERNMENT BANKS USING A PARAMETRIC MODEL

The purpose of this research is to measure cost and profit efficiency for the Iran's commercial and public banks. We also determine time variant efficiency factors for period 1381-1384 (2001-2004). To measure the efficiency, we use stochastic frontier analysis (SFA) and error component model following Battese and Coelli (1992) using the Maximum Likelihood method and a panel data. Labor, physical capital, and financial capital are considered as inputs, and loans, bonds and other earning assets as outputs. The results show that most of the private banks are more efficient in profit efficiency than public banks, while most of the public banks are more efficient than private banks in cost efficiency. The cost efficiency has decreased but the profit efficiency has increased for the period under consideration. Profit efficiency is not positively correlated with cost efficiency, suggesting the possibility that cost and revenue inefficiencies may be negatively correlated. Cost efficiency ranges from 46.88 percent (Bank Saderat) to 91.58 percent (Bank Tejarat) with an average of 68.8 percent, and profit efficiency from 61.16 percent (Bank Melli) to 94.85 percent (Bank Sepah) with an average of 85.3 percent. Average and variance of profit efficiency is more than those of cost efficiency, implying profit efficiency is influenced by more variables.