Logistics Information Management

Modeling the operating efficiency of banks: a nonparametric methodology

Minwir Al-Shammari Anwar Salimi
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Modeling the operating
efficiency of banks:
a nonparametric
methodology
Minwir Al-Shammari and
Anwar Salimi
The authors
Minwir Al-Shammari is Associate Professor, College of
Downloaded by University of Ghana At 16:32 27 June 2016 (PT)
Business Administration, University of Bahrain, Bahrain.
Anwar Salimi is Professor of Accounting, California State
University at Pomona, California, USA.
Abstract
This paper seeks to model and evaluate the comparative
operating efficiency of banks using a nonparametric
methodology known as the data envelopment analysis
(DEA). The paper adopts a modified version of DEA in
which no inputs are specified. The only variables consid-
ered are the financial ratios. The results obtained suggest
that the majority of banks investigated are fairly inefficient
over the period 1991-94. In addition to calculating effi-
ciency scores for all banks in the sample, the study results
revealed the composite reference set and their shadow
prices, major determinants of banks relative performance,
and the target financial ratios.
Logistics Information Management
Volume 11 Number 1 1998 pp. 517
MCB University Press ISSN 0957-6053
Introduction
The banking sector in Jordan is one of the
most important in the economy. The coun-
trys banks, which are privately owned, pro-
vide capital for industry, construction, and
trade. The banks are also the most heavily
traded securities on the Amman Financial
Market (AFM). Therefore, analysis of bank
efficiency is important from the point of view
of investors, creditors, and the government. It
is also important from the point of view of the
banks management so they can gauge their
own performance and compare it against
other banks.
The operating efficiency of banks has been
analyzed using traditional tools of financial
analysis such as ratio analysis and others
(Ricketts and Stover, 1978). In recent years,
however, a nonparametric technique namely
Data Envelopment Analysis (DEA) has been
used successfully in measuring the efficiency
of banks and other organizations (Drake and
Howcroft, 1994).
Objectives of the study
The objective of this study is to measure and
compare the financial performance of banks
in Jordan. The study aims at identifying the
relatively best-performing banks and the
relatively worst-performing banks. It also
seeks to identify banks efficiency scores,
ranks, slacks, and target inputs and outputs.
Traditional techniques for modeling finan-
cial performance have certain methodological
drawbacks which are discussed in the follow-
ing section. This study uses DEA methodolo-
gy to model the comparative efficiency of
banks in Jordan. The results of the study may
be useful to investors, creditors, the govern-
ment and the management of the banks them-
selves in assessing their performance.
Traditional financial statement analysis
Ratio analysis has been used extensively in
financial statement analysis for both norma-
tive and positive purposes (Whittington,
1980). The normative approach compares a
firms ratio to a benchmark such as an indus-
try average to judge its performance. The
The authors wish to pay special thanks to Professor
Peter Smith at York University, York, UK, for his
assistance in running the data.
5
 Modeling the operating efficiency of banks
Minwir Al-Shammari and Anwar Salimi
positive approach uses ratios to predict future
performance such as earnings and also to
predict bankruptcy and assess the riskiness of
the firm.
Both the normative and positive approach-
es have had some success. However, there
have been numerous methodological prob-
lems pointed out by Barnes (1987), Smith
(1990), and Fernandez-Castro and Smith
(1994).
One of the prime reasons for using ratios is
to control for the effect of size on the financial
variables being studied so that one can com-
pare different firms or compare a firm to an
industry average. However, this control for
size depends on the assumption of there being
a proportionality between numerator and
denominator. This proportionality assump-
tion may not be true in many cases, thus
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leading to erroneous conclusions being drawn
from ratio analysis.
Another problem with using ratio analysis
is that choice of a single ratio does not provide
enough information about the various dimen-
sions of performance of a firm. Considering
many ratios is costly and there may be con-
flicting signals emerging from competing
ratios. Aggregation of ratios is usually avoided
because it requires weighting the ratios in
some fashion and any such weighting is ulti-
mately arbitrary.
A problem which also arises with ratio
analysis is the choice of a benchmark against
which to compare a univariate or multivariate
score from ratio analysis. The choice of
benchmark depends on the costs to a user of
an error in prediction and different users may
require different benchmarks for different
purposes. However, this is not explicitly
considered in most studies using ratio analy-
sis.
The problems in ratio analysis pointed out
above have prompted researchers to find new
ways of addressing the issue of efficiency
analysis of firms. One such technique which
has been used in recent years is a mathemati-
cal programming technique known as data
envelopment analysis (DEA).
Modeling with data envelopment
analysis
DEA is a nonparametric mathematical pro-
gramming model used to evaluate the relative
efficiency of a group of entities or decision-
making units (DMUs) in their use of multiple
6
Logistics Information Management
Volume 11 Number 1 1998 517
inputs to produce multiple outputs where the
form of the production is not known or speci-
fied as is the case with the parametric
approach. DMUs refer to the collection of
firms, departments, divisions, or administra-
tive units with the same goals and objectives
which have common inputs and outputs.
Examples of DMUs include hospitals,
schools, courts, banks, and so on.
DEA is based on the pioneering work of
Farrell (1957). However, it was the work of
Charnes et al. (1978) which developed this
technique. They generalized Farrells frame-
work to include multiple incommensurate
inputs and multiple incommensurable out-
puts and reformulated as a mathematical
programming model to assess the compara-
tive efficiency of DMUs.
The original DEA model developed by
Charnes et al. (1978) is a fractional and non-
linear model. The objective function in that
model was to maximize the ratio of weighted
outputs to weighted inputs for a particular
DMU. This is done subject to the constraints
(one for each DMU) that the ratio of weighted
outputs to weighted inputs is equal to or less
than 1. The decision variables are output
weights (one for each type of output) and
input weights (one for each type of input).
The DEA approach uses a linear program-
ming (LP) model to construct a hypothetical
composite unit based on all units in the refer-
ence group. That is, the performance of each
DMU is measured relative to the performance
of all other DMUs. The unit being evaluated
can be judged relatively inefficient if the com-
posite unit requires less input to obtain the
output achieved by the unit being evaluated,
or judged relatively efficient if the composite
unit requires as much input as the unit being
evaluated does. A composite unit is a hypo-
thetical best-practice unit made up of a subset
of units that should be emulated by a given
inefficient unit in order to improve the efficien-
cy of its operation. DEA results help in identi-
fying the relatively inefficient DMUs and
providing insights into ways to improve pro-
ductivity of these relatively inefficient units
without reducing quality of service and while
maintaining or even increasing the volume of
services provided by DMUs.
DEA analysis has been used in a number of
settings to evaluate the performance of organi-
zations including rate collection departments
(Thanassoulis et al., 1987), school districts
(Bessent et al., 1983), hospitals (Sherman,
 Modeling the operating efficiency of banks
Minwir Al-Shammari and Anwar Salimi
1984), court systems (Lewin et al., 1982), and
university accounting departments (Tomkins
and Green, 1988).
DEA has also been used in a number of
bank studies. Sherman and Gold (1985) used
DEA to evaluate bank branch operating
efficiency for a savings bank in the USA with
14 branch offices. They located inefficient
branches by explicitly considering the mix of
services provided and the resources used to
provide these bank services. Vassiloglou and
Giokas (1990) used DEA to assess the relative
efficiency of bank branches at the Commer-
cial Bank of Greece. Drake and Howcroft
(1994) used DEA to assess the relative effi-
ciency of the branches of a UK bank.
Corporate performance is
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multidimensional in nature and there
exist a variety of indicators of it
represented by financial ratios
The previous bank studies have considered
the efficiency of bank operations by looking at
the output of services produced by banks
compared to the inputs consumed. Fernan-
dez-Castro and Smith (1994) have presented
a general nonparametric model for ratio
analysis. They assume that corporate perfor-
mance is multidimensional in nature and that
there exist a variety of indicators of corporate
performance. These indicators are represent-
ed by financial ratios. The ratios may be
considered:
[T]he outputs of the firms activities, presented
so as to permit comparison of firms of different
size. If the DMUs are operating in similar
environments they are perhaps operating in
similar financial and product markets then the
inputs to the firms can be considered immateri-
al, as they can be assumed to equal for all, after
adjusting for firm size. The interest of the
analysis is then in finding the companies which
secure what are in some sense the best finan-
cial ratios (outputs) amongst the firms observed
(Fernandez-Castro and Smith, 1994).
Fernandez-Castro and Smith (1994) then
cast this problem as a standard LP model to
which DEA can be applied.
Methodology
The present study adopts the Fernandez-
Castro and Smiths (1994) approach to
7
Logistics Information Management
Volume 11 Number 1 1998 517
evaluate the performance of banks in Jordan.
In contrast to the original, Charnes et al.s
(1978) model, no inputs are specified. The
model can be written as:
Maximize Z0
N =1
subject to n rin z0 ri 0 i = 1, , m
n =1
N
n =1
n =1
Z 0 0; n 0 ( n = 1, ..., N )
where Z0 indicates the ratio efficiency score of
bank 0, n represents the weight placed on
each of the banks in forming the efficiency
frontier for bank 0, and ri refers to the
observed ratios for bank 0. N represents the
number of banks which are appraised on m
financial ratios.
The DEA model was applied to four data
sets of 16 out of 18 commercial banks operat-
ing in Jordan. The data sets for the study (see
Table I) were obtained from the Amman
Financial Market (1995), and represented a
four-year period (1991-94). Two banks had to
be omitted because they did not have the data
available to compute the desired ratios in
certain years.
The ratios used in the study were chosen
subject to the constraint of the model that a
high value of the ratio is better than a low
value. The ratios chosen for the study are all
valid indicators of performance. They are
usually found in textbooks and in research
studies as indicators of banks performance.
One way that ratios are traditionally classified
is given below. All such classifications are
ultimately arbitrary. However, together, the
various categories cover the various aspects of
performance of a firm. The categories of
ratios are as follows:
(1) Profitability ratios which measure the
earnings ability of a firm.
(2) Investor ratios which are of particular use
in making investment decisions.
(3) Activity ratios that measure the efficiency
of use of assets.
(4) Liquidity ratios which measure a firms
ability to meet its current obligations.
(5) Leverage ratios which measure the degree
of long-term debt in the capital structure
of the firm.
It was decided to choose ratios from each of
the categories given above (except leverage
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table I Financial ratios for banks (1991-1994)

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1991
Bank 1 62.85 38.27 41.13 12.17 0.77 15.47
Bank 2 56.94 46.88 57.91 0.19 0.68 7.53
Bank 3 79.81 29.41 34.5 0.32 0.1 3.04
Bank 4 67.8 41.06 50.06 0 0 0
Bank 5 30.21 61.33 68.28 0 0 0
Bank 6 176.56 55.82 22.95 0.2 1.27 11.16
Bank 7 62.76 40.6 47.42 0.29 0.42 10.56
Bank 8 71.7 31.92 35.62 0.06 0.13 2.89
Bank 9 81.49 24.01 26.65 0.19 0.6 9.11
Bank 10 45.23 58.52 69.74 0.22 0.45 12.28
Bank 11 82.11 35.15 47.53 0.09 1.05 7.58
Bank 12 87.56 21.94 24.91 0.25 0.93 13.38
Bank 13 33.05 63.6 120 0.19 5.27 14.91
Bank 14 59.11 52.25 71.78 0.16 1.76 0
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Bank 15 81.18 40.25 58.91 0.1 1.29 9.59

Bank 16 75.4 21.59 23.9 0 0 0
1992
Bank 1 65.19 36.43 39.45 12.51 0.77 14.19
Bank 2 59.58 45.71 56.38 0.27 0.86 10.51
Bank 3 71.84 34.6 40.21 2.93 0.88 21.66
Bank 4 63.11 45.2 55.17 1.5 0.62 11.12
Bank 5 36.46 61.26 72.66 0 0 0
Bank 6 162.37 55.84 210.62 0.42 2.23 20.25
Bank 7 64.51 38.77 44.59 0.4 0.48 13.26
Bank 8 69.04 33.68 37.27 0.08 0.19 4.5
Bank 9 76.04 28.44 30.98 0.37 0.92 15.55
Bank 10 42.82 59.7 69.21 0.27 0.44 13.53
Bank 11 85.04 28.75 35.76 0.31 1.98 23
Bank 12 82.11 25.94 29.06 0.29 0.91 14.31
Bank 13 56.56 59.22 124.59 1 17.79 51.83
Bank 14 64.43 31.23 35.1 0 0 0
Bank 15 74.61 38.17 49.39 0.06 0.47 5.3
Bank 16 62.7 36.65 41.7 0.14 0.58 9.26
1993
Bank 1 66.93 36.47 39.47 13.51 0.79 13.76
Bank 2 52.88 53.79 67.6 0.46 1.31 15.89
Bank 3 69.03 37.9 44.45 3.58 0.96 21.62
Bank 4 64.88 44.39 55.93 0.13 0.49 6.4
Bank 5 35.59 61.93 71.18 0 0 0
Bank 6 137.34 59.1 203.9 0.42 2.42 21.3
Bank 7 51.51 49.68 58.02 0.55 0.74 16.09
Bank 8 64.78 40.45 48.27 0.09 0.35 5.21
Bank 9 75.22 33.03 38.09 0.26 1.22 12.2
Bank 10 42.62 62.21 77.09 0.15 0.43 5.77
Bank 11 73.39 35.01 42.06 0.3 1.55 19.73
Bank 12 76.73 31.67 36.09 0.41 1.18 16.94
Bank 13 37 44.84 104.62 1.28 17.9 46.35
Bank 14 72.01 29.67 34.19 0.06 0.75 10.6
Bank 15 66.09 43.59 55.07 0.21 1.53 17.39
Bank 16 54.71 49.28 56.32 0.14 0.58 8.08
(Continued)
8
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table I

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1994
Bank 1 64.09 39.11 42.55 16.01 0.85 14.47
Bank 2 60.07 47.93 61.28 0.32 1.28 14.08
Bank 3 60.26 43.71 50.77 0.41 0.97 22.81
Bank 4 62.24 44.16 53.12 0 0 0
Bank 5 44.76 58.32 72.46 0 0 0
Bank 6 151.46 70.77 383.37 0.29 1.77 13.43
Bank 7 46.54 53.88 63.75 0.41 0.51 11.28
Bank 8 61.9 43.61 52.22 0.09 0.39 4.66
Bank 9 73.75 34.12 39.36 0.2 0.83 8.88
Bank 10 37.58 65.29 79.56 0.21 0.52 7.64
Bank 11 67.18 36.58 43.27 0.14 0.73 8.52
Bank 12 70.18 38.32 44.64 0.24 1.13 17.65
Bank 13 22.29 45.77 122.06 1.6 18.24 38.92
Bank 14 62.29 35.27 40.16 0 0 0
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Bank 15 60.28 45.54 60.88 0.19 1.25 13.8

Bank 16 54.37 49.53 57.81 0.21 0.73 10.56

ratios), subject to the condition of the model
that a high ratio be better than a low ratio, in
order to get multidimensional indicators of
the performance of the bank. It was decided
to leave out leverage ratios because it cannot
be unambiguously concluded that a high
leverage ratio is good for the firm. A high
leverage ratio may be good for the firm if it
can trade successfully on the equity and take
advantage of the tax shield provided by debt.
On the other hand a high leverage ratio can be
an indicator of high risk and may therefore be
bad for a firm. Fernandez-Castro and Smith
(1994) also indicated in their study that lever-
age ratios may lead to confusing results.
The ratios chosen for the study were as
follows:
(1) Return on investment = (Net income
after taxes 100) / Total assets
(2) Return on equity = (Net income after
taxes 100) / Shareholders equity
(3) Earnings per share = Net income after
taxes / Number of subscribed shares
(4) Credits to total assets = (Credits granted
100) / Total assets
(5) Credits to deposits = (Credits granted
100) / Total deposits
(6) Cash and portfolio investment to deposits
= (Cash and portfolio investment)/
Deposits
The ratios chosen above cover all the tradition-
al categories of ratios used in the assessment of
9
the various performance aspects of a bank.
Ratios 1 and 2 are generally considered good
indicators of the profitability of a firm. The
third ratio, earnings per share, is particularly
useful for investors. Ratios 4 and 5 are good
activity measures for a bank. Ratio 6 is a good
indicator of the liquidity of the bank. A high
ranking in the above ratios is generally consid-
ered an indicator of good financial perfor-
mance.
Solutions to the DEA model
The DEA assessment results for the years
1991-94 are given in Tables II-IV. The effi-
ciency scores, ranks, and composite DMUs
are given in Table II. In 1991, out of the
sample of 16 banks, three (18.75 percent)
were found to be relatively efficient (Z = 100
percent) and 13 (81.25 percent) were rated as
relatively inefficient (Z < 100 percent). In
1992, 1993, and 1994, the number of relative-
ly efficient banks went up to four (25 percent)
whereas the relatively inefficient ones dropped
to 12 (75 percent). The lowest efficiency score
was 52.61 percent (bank 16) in 1991, 54.12
percent (bank 14) in 1992, 52.43 per cent
(bank 14) in 1992, and 49.84 (bank 14) in
1994. It is also interesting to note that three
banks (bank 1, bank 6, and bank 13) contin-
ued to be relatively the most efficient (Z = 100
per cent) ones compared with the rest of
banks in the set from 1991 through 1994.
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table II Efficiency scores, ranks and efficient DMUs (1991-1994)

Best reference DMUs

Bank Efficiency Rank Bank Weight Bank Weight Bank Weight
1991
Bank 1 1.0000 1
Bank 2 0.7654 6 1 0.00 6 0.29 13 0.71
Bank 3 0.6283 11 1 0.03 6 0.65 13 0.32
Bank 4 0.6841 10 6 0.46 13 0.54
Bank 5 0.9643 2 13 1.00
Bank 6 1.0000 1
Bank 7 0.7544 7 1 0.3 6 0.29 13 0.40
Bank 8 0.5909 12 6 0.62 13 0.38
Bank 9 0.6890 9 1 0.4 6 0.51 13 0.09
Bank 10 0.9337 3 1 0.00 6 0.11 13 0.89
Bank 11 0.7240 8 6 0.56 13 0.44
Bank 12 0.9377 3 1 0.71 6 0.28 13 0.02
Bank 13 1.0000 1
Bank 14 0.8480 4 6 0.26 13 0.74
Bank 15 0.7995 5 6 0.48 13 0.52
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Bank 16 0.5261 13 6 0.77 13 0.23

1992
Bank 1 1.0000 1
Bank 2 0.7717 3 5 0.48 6 0.29 13 0.23
Bank 3 0.7317 4 1 0.28 6 0.37 13 0.35
Bank 4 0.7992 2 1 0.09 6 0.20 13 0.71
Bank 5 1.0000 1
Bank 6 1.0000 1
Bank 7 0.6666 6 5 0.16 6 0.41 13 0.43
Bank 8 0.5834 9 5 0.35 6 0.65
Bank 9 0.559 11 1 0.01 6 0.75 13 0.24
Bank 10 0.9845 1 5 0.72 6 0.01 13 0.27
Bank 11 0.7041 5 6 0.61 13 0.39
Bank 12 0.5649 10 1 0.00 6 0.84 13 0.16
Bank 13 1.0000 1
Bank 14 0.5412 12 5 0.34 6 0.66
Bank 15 0.6586 7 5 0.39 6 0.61
Bank 16 0.6274 8 5 0.42 6 0.49 13 0.09
1993
Bank 1 1.0000 1
Bank 2 0.9031 3 1 0.01 6 0.76 10 0.023
Bank 3 0.8035 5 1 0.29 6 0.40 13 0.31
Bank 4 0.7313 8 6 0.49 10 0.51
Bank 5 0.9955 2 10 1.00
Bank 6 1.0000 1
Bank 7 0.8415 4 1 0.02 6 0.85 10 0.13
Bank 8 0.6694 10 6 0.57 10 0.43
Bank 9 0.5617 12 1 0.00 6 0.98 13 0.02
Bank 10 1.0000 1
Bank 11 0.6845 9 6 0.70 13 0.30
Bank 12 0.6504 11 1 0.00 6 0.81 13 0.19
Bank 13 1.0000 1
Bank 14 0.5243 13 6 1.00
Bank 15 0.7510 7 6 0.93 13 0.07
Bank 16 0.8032 6 6 0.28 10 0.72
(Continued)
10
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table II

Best reference DMUs

Bank Efficiency Rank Bank Weight Bank Weight Bank Weight
1994
Bank 1 1.0000 1
Bank 2 0.7355 5 6 0.78 13 0.22
Bank 3 0.8011 3 6 0.41 13 0.59
Bank 4 0.6240 9 6 1.00
Bank 5 0.8241 2 6 1.00
Bank 6 1.0000 1
Bank 7 0.7770 4 1 0.01 6 0.95 13 0.04
Bank 8 0.6162 10 6 1.00
Bank 9 0.5410 11 6 0.88 13 0.12
Bank 10 1.0000 1
Bank 11 0.5353 12 6 0.90 13 0.10
Bank 12 0.7271 6 6 0.57 13 0.43
Bank 13 1.0000 1
Bank 14 0.4984 13 6 1.00
Bank 15 0.7038 8 6 0.76 13 0.24
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Bank 16 0.7134 7 6 0.95 13 0.05

The efficiency rating does not only rank order
the banks, but also suggests the degree of
inefficiency of a bank compared with its effi-
ciency reference set. Next to each of the
relatively inefficient banks appears the corre-
sponding efficiency composite DMUs (refer-
ence subset) and their associated shadow
prices (weights). For example, bank 2 is 76.54
per cent as efficient as its reference set (bank
1, bank 16, and bank 13). This means that it
would have to increase its outputs by 23.46
per cent to become as efficient as its reference
subset.
The study also reports further analysis of
the reasons of efficiency, given by the weight-
ings and slacks of financial ratios for the inves-
tigated banks. These results are given in Table
III. For efficient firms, a zero slack in the
inequalities is associated with a zero and non-
zero weights and suggests good performance
on the relevant ratio. A zero slack also sug-
gest that the constraint is significantly bind-
ing. The determinants of efficiency are ratios
with binding (zero slack) constraints. For
instance, the results for 1991 given in Table
III indicate that the ratios that contributed to
the efficiency of bank 1 in 1991 are the ratios
that assumed non-zero weightings (zero
slacks). These ratios were return on invest-
ment, earnings per share, and credits to total
assets. Their weights, respectively, were:
0.30, 0.29, and 0.42. These results suggest
that although ratio 1 (return on investment)
and ratio 2 (earnings per share) contribute to
11
the efficiency of bank 1 in 1991, the bank
was more reliant on ratio 3 (credits to total
assets) than other ratios in the attainment of
its performance. One can also note from the
data for 1991 and 1992 given in Table III
that the return on investment (ratio 1) con-
straint was binding for all banks in those
particular years. This also means that it
contributes, with varying degrees, to the
performance of all banks in the sample in
1991 and 1992.
The analysis of weightings for inefficient
banks reveals additional insights. A zero
weight for a particular ratio implies a strictly
positive slack in the inequalities and suggests
poor performance of the bank on the relevant
ratio. This also suggests that the constraint of
that ratio is nonbinding. For instance, a
glance at Table III shows that ratio 5 (credits
to deposits) assumed the position of the prin-
cipal determinant of the poor performance, as
it was nonbinding (positive slacks) for 12 of
the 16 banks for the years 1991-94. Along
with ratio 5, ratio 3 (credits to total assets)
assumed the position of the principal determi-
nant of the poor performance for 12 out of 16
banks in the years 1992 through 1994. In
1991, ratio 3 was nonbinding for only seven of
16 banks, whereas ratio 6 (cash and portfolio
investments to deposits) was nonbinding for
ten banks in 1991.
In addition to identifying the magnitude of
inefficiency, efficient subset of banks, slacks,
and weights of the financial ratios, the DEA
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table III Slacks and weightings of financial ratios (1991-1994)

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1991
Bank 1 0.00 0.00 0.00 0.00 0.00 0.00
(0.30) (0.00) (0.29) (0.42) (0.00) (0.00)
Bank 2 0.00 0.00 16.11 0.00 3.21 4.00
(0.06) (0.93) (0.00) (0.00) (0.00) (0.00)
Bank 3 0.00 11.08 0.00 0.00 2.40 7.65
(0.60) (0.00) (0.38) (0.02) (0.00) (0.00)
Bank 4 0.00 0.00 2.15 0.19 3.43 13.18
(0.08) (0.92) (0.00) (0.00) (0.00) (0.00)
Bank 5 1.72 0.00 49.19 0.19 5.27 14.91
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 6 0.00 0.00 0.00 (0.00) 0.00 0.00
(0.83) (0.00) (0.16) (0.10) (0.00) (0.00)
Bank 7 0.00 0.00 5.74 3.38 2.22 0.00
(0.12) (0.16) (0.00) (0.00) (0.00) (0.72)
Downloaded by University of Ghana At 16:32 27 June 2016 (PT)

Bank 8 0.00 4.79 0.00 0.09 2.59 7.71

(0.58) (0.00) (0.42) (0.00) (0.00) (0.00)
Bank 9 0.00 14.57 0.00 4.75 0.54 0.00
(0.26) (0.00) (0.05) (0.00) (0.00) (0.70)
Bank 10 0.00 0.00 34.68 0.00 4.35 1.36
(0.04) (0.95) (0.00) (0.01) (0.00) (0.00)
Bank 11 0.00 10.69 0.00 0.07 1.58 2.34
(0.54) (0.00) (0.46) (0.00) (0.00) (0.00)
Bank 12 0.00 20.19 11.01 8.37 0.00 0.00
(0.19) (0.00) (0.00) (0.00) (0.02) (0.79)
Bank 13 0.00 0.00 0.00 0.00 0.00 0.00
(0.03) (0.97) (0.00) (0.01) (0.00) (0.00)
Bank 14 0.00 0.00 10.57 0.00 2.17 13.95
(0.06) (0.94) (0.00) (0.00) (0.00) (0.00)
Bank 15 0.00 9.54 0.00 0.07 1.75 1.13
(0.48) (0.00) (0.52) (0.00) (0.00) (0.00)
Bank 16 0.00 16.58 0.00 0.20 2.20 12.03
(0.68) (0.00) (0.32) (0.00) (0.00) (0.00)
1992
Bank 1 0.00 0.00 0.00 0.00 0.00 0.00
(0.04) (0.57) (0.00) (1.38) (0.00) (0.00)
Bank 2 0.00 0.00 51.11 0.00 3.61 4.08
(0.05) (0.95) (0.00) (0.01) (0.00) (0.00)
Bank 3 0.00 4.31 77.70 0.00 6.06 0.00
(0.43) (0.43) (0.43) (0.43) (0.43) (0.43)
Bank 4 0.00 0.00 65.80 0.00 12.36 28.20
(0.05) (0.89) (0.00) (0.06) (0.00) (0.00)
Bank 5 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 6 0.00 0.00 0.00 0.00 0.00 0.00
(0.11) (0.88) (0.00) (0.01) (0.00) (0.00)
Bank 7 0.00 0.00 84.64 0.00 7.80 10.59
(0.06) (0.93) (0.00) (0.01) (0.00) (0.00)
Bank 8 0.00 0.00 98.50 0.14 1.12 5.46
(0.08) (0.92) (0.00) (0.00) (0.00) (0.00)
(Continued)
12
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table III

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
Bank 9 0.00 5.62 133.00 0.00 4.33 0.00
(0.59) (0.00) (0.00) (0.03) (0.00) (0.38)
Bank 10 0.00 0.00 18.11 0.00 4.36 0.45
(0.03) (0.97) (0.00) (0.01) (0.00) (0.00)
Bank 11 0.00 16.34 126.01 0.21 5.53 0.00
(0.52) (0.00) (0.00) (0.00) (0.00) (0.48)
Bank 12 0.00 10.47 145.34 0.00 3.12 0.00
(0.63) (0.00) (0.00) (0.02) (0.00) (0.35)
Bank 13 0.00 0.00 0.00 0.00 0.00 0.00
(0.04) (0.93) (0.00) (0.03) (0.00) (0.00)
Bank 14 0.00 0.00 98.30 0.28 1.46 13.28
(0.08) (0.92) (0.00) (0.00) (0.00) (0.00)
Bank 15 0.00 0.00 81.84 0.17 0.65 4.31
(0.08) (0.92) (0.00) (0.00) (0.00) (0.00)
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Bank 16 0.00 0.00 78.55 0.08 1.83 0.00

(0.06) (0.93) (0.00) (0.00) (0.00) (0.01)

1993
Bank 1 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (0.00) (0.19) (0.81) (0.00) (0.00)
Bank 2 55.90 0.00 97.60 0.00 0.49 0.00
(0.00) (0.94) (0.00) (0.01) (0.00) (0.05)
Bank 3 0.00 0.99 70.41 0.00 5.56 0.00
(0.39) (0.00) (0.00) (0.15) (0.00) (0.46)
Bank 4 0.00 0.00 62.32 0.10 0.73 4.58
(0.05) (0.95) (0.00) (0.00) (0.00) (0.00)
Bank 5 6.87 0.00 5.59 0.15 0.43 5.77
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 6 0.00 0.00 0.00 0.00 0.00 0.00
(0.62) (0.00) (0.00) (0.01) (0.00) (0.36)
Bank 7 62.34 0.00 115.05 0.00 1.25 0.00
(0.00) (0.93) (0.00) (0.02) (0.00) (0.05)
Bank 8 0.00 0.00 77.48 0.17 1.04 6.87
(0.05) (0.95) (0.00) (0.00) (0.00) (0.00)
Bank 9 1.53 0.00 134.01 0.00 151.00 0.00
(0.00) (0.83) (0.00) (0.01) (0.00) (0.15)
Bank 10 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (0.99) (0.00) (0.00) (0.01) (0.01)
Bank 11 0.00 3.67 112.65 0.24 4.80 0.00
(0.48) (0.00) (0.00) (0.00) (0.00) (0.52)
Bank 12 0.00 7.61 128.91 0.00 3.55 0.00
(0.54) (0.00) (0.00) (0.02) (0.00) (0.44)
Bank 13 0.00 0.00 0.00 0.00 0.00 0.00
(0.17) (0.00) (0.00) (0.04) (0.00) (0.79)
Bank 14 0.00 2.51 138.69 0.31 0.99 1.08
(1.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Bank 15 41.90 0.00 123.21 0.20 1.53 0.00
(0.00) (0.81) (0.00) (0.00) (0.00) (0.19)
Bank 16 0.67 0.00 42.00 0.05 0.26 0.00
(0.00) (0.97) (0.00) (0.00) (0.00) (0.03)
(Continued)
13
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table III

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1994
Bank 1 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (0.00) (0.11) (0.89) (0.00) (0.00)
Bank 2 40.84 0.00 241.48 0.15 3.72 0.00
(0.00) (0.78) (0.00) (0.00) (0.00) (0.22)
Bank 3 0.00 1.45 165.77 0.55 10.28 0.00
(0.34) (0.00) (0.00) (0.00) (0.00) (0.66)
Bank 4 51.72 0.00 298.24 0.29 1.77 13.43
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 5 97.14 0.00 295.44 0.29 1.77 13.43
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 6 0.00 0.00 0.00 0.00 0.00 0.00
(0.70) (0.00) (0.00) (0.01) (0.00) (0.30)
Bank 7 85.09 0.00 286.33 0.00 1.80 0.00
(0.00) (0.83) (0.00) (0.01) (0.00) (0.15)
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Bank 8 51.01 0.00 298.63 0.14 1.14 5.87

(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 9 0.00 4.77 280.01 0.07 2.16 0.00
(0.62) (0.00) (0.00) (0.00) (0.00) (0.38)
Bank 10 0.00 0.00 0.00 0.00 0.00 0.00
(0.27) (0.99) (0.23) (0.00) (0.00) (0.03)
Bank 11 13.37 0.00 277.06 0.16 2.01 0.00
(0.00) (0.81) (0.00) (0.00) (0.00) (0.19)
Bank 12 0.00 7.44 210.82 0.52 7.22 0.00
(0.44) (0.00) (0.00) (0.00) (0.00) (0.56)
Bank 13 0.00 0.00 0.00 0.00 0.00 0.00
(0.10) (0.00) (0.00) (0.04) (0.00) (0.86)
Bank 14 26.47 0.00 302.79 0.29 1.77 13.43
(0.00) (1.00) (0.00) (0.00) (0.00) (0.00)
Bank 15 34.49 0.00 233.52 0.34 3.99 0.00
(0.00) (0.77) (0.00) (0.00) (0.00) (0.23)
Bank 16 68.30 0.00 288.28 0.07 1.63 0.00
(0.00) (0.83) (0.00) (0.00) (0.00) (0.17)
Note:
Weightings of financial ratios in parentheses

methodology provides a much more detailed
analysis of the actual and target (composite)
financial ratios as given in Table IV. The
financial ratios of composite DMUs are
derived by multiplying the actual financial
ratios of each bank by the associated weights
of the reference set (taken from Table II). The
banks with a nonzero shadow price are the
efficiency reference set. For instance, the
target score for the first financial ratio (return
on investment) for bank 2 in 1991 was 74.39
percent whereas the actual ratio was 56.94
percent. This means that there was a 17.45
percent deficiency in the return on investment
ratio compared with composite of bank 1,
14
bank 6, and bank 13. The 74.39 percent
composite efficiency score was computed as
follows:
(0.00 62.85) + (0.29 176.56)
+ (0.71 33.05) = 74.39 percent
Summary and conclusions
DEA is becoming an increasingly popular
modeling tool for measuring the relative
performance of DMUs. This paper described
the application of DEA methodology to the
modeling and evaluation of the relative effi-
ciency of 14 banks. A modified LP model, in
which no inputs were specified, was utilized.
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table IV Actual and target financial ratios (1991-1994)

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1991
Bank 2 56.940 46.880 57.910 0.190 0.680 7.530
(74.39) (61.25) (91.77) (0.25) (4.1) (13.84)
Bank 3 79.810 29.410 34.500 0.320 0.100 3.040
(127.03) (57.89) (54.91) (0.51) (2.55) (12.49)
Bank 4 67.800 41.060 50.060 0.000 0.000 0.000
(99.11) (60.025) (75.33) (0.19) (3.43) (13.18)
Bank 5 30.210 61.330 68.280 0.000 0.000 0.000
(33.05) (63.6) (120.19) (0.19) (5.27) (14.91)
Bank 7 62.760 40.600 47.420 0.290 0.420 10.560
(83.19) (53.82) (68.6) (3.76) (2.78) (14.00)
Bank 8 71.700 31.920 35.620 0.060 13.000 2.890
(121.35) (58.81) (60.29) (0.2) (2.81) (12.6)
Bank 9 81.490 24.010 26.650 0.190 0.600 9.110
(118.28) (49.42) (38.68) (5.03) (1.41) (13.22)
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Bank 10 45.230 58.520 69.740 0.220 0.450 12.280

(48.44) (62.68) (109.37) (0.24) (4.83) (14.51)
Bank 11 82.110 35.150 47.530 0.090 1.050 7.580
(113.42) (59.24) (65.65) (90.2) (3.03) (12.81)
Bank 12 87.860 21.940 24.910 0.250 0.930 13.380
(93.7) (43.59) (37.58) (8.64) (0.99) (14.27)
Bank 14 59.110 52.250 71.780 0.160 1.760 0.000
(69.7) (61.61) (95.22) (90.19) (4.25) (13.95)
Bank 15 81.180 40.250 58.910 0.100 1.290 9.590
(101.54) (59.89) (73.68) (0.19) (93.36) (13.12)
Bank 16 75.400 21.590 23.900 0.000 0.000 0.000
(143.329) (57.62) (45.43) (0.2) (2.2) (12.3)
1992
Bank 2 59.58 45.71 56.38 0.27 0.86 10.51
(77.21) (59.24) (124.17) (0.35) (4.72) (17.70)
Bank 3 71.84 34.60 40.21 2.93 0.88 21.66
(98.18) (51.59) (132.65) (4.00) (7.26) (29.60)
Bank 4 63.11 45.20 55.17 1.50 0.62 11.12
(78.97) (56.56) (134.84) (1.88) (13.13) (42.11)
Bank 7 64.51 38.77 44.59 0.40 0.48 13.26
(96.78) (58.16) (151.63) (0.60) (8.52) (30.48)
Bank 8 69.04 33.68 37.27 0.08 0.19 4.50
(118.35) (57.73) (162.39) (0.27) (1.45) (13.17)
Bank 9 76.04 28.44 30.98 0.37 0.92 15.55
(136.03) (56.49) (188.42) (0.66) (5.97) (27.82)
Bank 10 42.82 59.70 69.21 0.27 0.44 13.53
(43.50) (60.64) (88.41) (0.27) (4.81) (14.20)
Bank 11 85.04 28.75 35.76 0.31 1.98 23.00
(120.77) (57.17) (176.80) (0.65) (8.35) (32.66)
Bank 12 82.11 25.94 29.06 0.29 0.91 14.31
(145.35) (56.38) (196.78) (0.51) (4.73) (25.33)
Bank 14 64.43 31.23 35.10 0.00 0.00 0.00
(119.05) (57.70) (163.15) (0.28) (1.46) (13.28)
Bank 15 74.61 38.17 49.39 0.06 0.47 5.30
(113.28) (57.95) (156.83) (0.26) (1.36) (12.35)
Bank 16 62.70 36.65 41.70 0.14 0.58 9.26
(99.94) (58.42) (145.01) (0.30) (2.76) (14.76)
(Continued)
15
 Modeling the operating efficiency of banks Logistics Information Management
Minwir Al-Shammari and Anwar Salimi Volume 11 Number 1 1998 517

Table IV

Cash and portfolio

Return on Return on Earnings per Credits to Credits to investments to
Bank investment equity share total assets deposits deposits
1993
Bank 2 52.88 53.79 67.60 0.46 1.31 15.89
(114.46) (59.56) (172.45) (0.51) (1.94) (17.59)
Bank 3 69.03 37.90 44.45 3.58 0.96 21.62
(85.91) (48.16) (125.73) (4.46) (6.76) (26.91)
Bank 4 64.88 44.39 55.93 0.13 0.49 6.40
(88.71) (60.70) (138.80) (0.28) (1.40) (13.33)
Bank 5 35.59 61.93 71.18 0.00 0.00 0.00
(42.62) (62.21) (77.09) (0.15) (0.43) (5.77)
Bank 7 51.51 49.68 58.02 0.55 0.74 16.09
(123.55) (59.04) (184.00) (0.65) (2.13) (19.12)
Bank 8 64.78 40.45 48.27 0.09 0.35 5.21
(96.78) (60.43) (149.60) (0.30) (1.57) (14.65)
Bank 9 75.22 33.03 38.09 0.26 1.22 12.20
(135.44) (58.60) (201.82) (0.46) (2.69) (21.72)
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Bank 11 73.39 35.01 42.06 0.30 1.55 19.73

(107.21) (54.82) (174.09) (0.68) (7.07) (28.82)
Bank 12 76.73 31.67 36.09 0.41 1.18 16.94
(117.97) (56.30) (184.40) (0.63) (5.36) (26.05)
Bank 14 72.01 29.67 34.19 0.06 0.75 10.60
(137.34) (59.10) (203.90) (0.42) (2.42) (21.30)
Bank 15 66.09 43.59 55.07 0.21 1.53 17.39
(129.91) (58.04) (196.54) (0.48) (3.57) (23.16)
Bank 16 54.71 49.28 56.32 0.14 0.58 8.08
(68.78) (61.35) (112.11) (0.22) (0.98) (10.06)
1994
Bank 2 60.07 47.93 61.28 0.32 1.28 14.08
(122.51) (65.17) (324.8) (0.58) (5.46) (19.14)
Bank 3 60.26 43.71 50.77 0.41 0.99 22.81
(75.22) (56.01) (229.14) (1.06) (11.49) (28.47)
Bank 4 62.24 44.16 53.12 0.00 0.00 0.00
(151.46) (70.77) (383.37) (0.29) (1.77) (13.43)
Bank 5 44.76 58.32 72.46 0.00 0.00 0.00
(151.46) (70.77) (383.37) (0.29) (1.77) (13.43)
Bank 7 46.54 53.88 63.75 0.41 0.51 11.28
(144.99) (69.35) (368.38) (0.53) (2.45) (14.52)
Bank 8 61.90 43.61 52.22 0.09 0.39 4.66
(151.46) (70.77) (383.37) (0.29) (1.77) (13.43)
Bank 9 73.75 34.12 39.36 0.20 0.83 8.88
(136.33) (67.84) (352.77) (0.44) (3.70) (16.42)
Bank 11 67.18 36.58 43.27 0.14 0.73 8.52
(138.86) (68.33) (357.89) (0.42) (3.38) (15.92)
Bank 12 70.18 38.82 44.64 0.24 1.13 17.65
(96.51) (60.14) (272.21) (0.85) (8.78) (24.27)
Bank 14 62.29 35.27 40.16 0.00 0.00 0.00
(151.46) (70.77) (383.37) (0.29) (1.77) (13.43)
Bank 15 60.28 45.54 60.88 0.19 1.25 13.80
(120.15) (64.71) (320.03) (0.61) (5.76) (19.61)
Bank 16 54.37 49.53 57.81 0.21 0.73 10.56
(144.51) (69.42) (369.31) (0.36) (2.66) (14.80)

Note:
Target financial ratios in parentheses
16
 Modeling the operating efficiency of banks
Minwir Al-Shammari and Anwar Salimi
The DEA is most useful when a comparison is
sought against best-practice DMUs.
The solution to the DEA models of investi-
gated banks provide a measure of the relative
efficiency of the target bank, the efficiency
reference set, the weights of ratios leading to
bank efficiency, and the target ratios for ineffi-
cient banks. The majority of banks (81.25
percent in 1991 and 75 percent in 1992
through 1994) have showed poor perfor-
mance compared with the subset of best-
practice ones. The efficient banks are known
as the peer group for the inefficient banks.
Bank 1, bank 6, and bank 13 are the peers for
the rest of banks throughout the period 1991-
94. A fairly detailed analysis was applied to
the composite of best-practice set and its
weights, the major determinants of banks
relative performance, and to the target finan-
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cial ratios for the relatively inefficient banks.
The results of this study appear to have
provided new insights about financial perfor-
mance of banks not available to managers
through financial statements and traditional
financial ratio analysis. Although DEA does
give top management of banks additional
information about the major determinants of
efficiency or inefficiency of banks which
undoubtedly would not be available by con-
ventional ratios, the DEA results yield their
best payoffs when interpreted and used in
conjunction with top managements personal-
ized knowledge and discretionary judgment of
the operations of their banks.
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