The effects of global financial crisis on Indian and Pakistan`s banking sector : is dual banking sector more stable?

Abstract

Recent economic crises have shown the impact not only to the well-developed banking sector but also to the developing banking sector in the emerging economies. This study seeks to investigate a comparative analysis of evolution of technical efficiency of commercial banks in India and Pakistan during the recent economic crises (2004-2010). Using Data Envelopment Analysis, we measure the technical efficiencies of each bank in the sample, which further decomposes to provide pure technical efficiency (PTE) and scale efficiency scores (SE).The parametric technique like t-Test and two non-parametric techniques Mann Whitney test and Krushka wallys test are employed for comparing the means of the obtained DEA result. As a robustness check, the technical efficiency score is further examined by the second stage regression model which accommodates to provide the relationship factor of bank specific variable, macro-economic & market condition and some binary variables to account for financial crises and stability. The empirical finding suggests that Indian banks` mean TE score exceeds higher than that of Pakistan banking sector and the changes in efficiency measure been seen higher in Pakistan banking sector. So in general, Pakistan banking sector efficiency is heavily affected from the financial crises than the Indian banking sector and former always remain more technically efficient in the period under study. Furthermore, mean PTE in both banking sector deteriorates relatively in a constant rate during the crises and post crises period, whereas mean SE improved in Pakistan banking sector than Indian banking sector. The result of multivariate regression analysis has exhibited liquidity risk, bank overhead cost, ROAA, and bank capitalization being positively related with technical efficiency. Conversely, bank size, loan default and non-interest expenses over asset variables exhibits negatively related with both banking sector efficiency. However, the regression analysis has shown Pakistan banking sector being more financially stable than the Indian banking sector in terms of efficiency during the crises period. Hence, the dual banking system is seen as more efficient and stable compare to the single banking system and thus single banking system should urge to seek the introduction of Islamic banking as economically viable and financially stable for the banking sector of a country. ii