Productivity and Economies in Pakistan's Commercial Banking Sector

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In this study we estimate the total factor productivity growth of Pakistan's commercial banking sector for the period 1992 - 2000 by bringing together the supply and demand sides of banking services. We employ the translog cost function that includes inputs like labour, capital, operating cost and deposits. The two outputs of the banking sector considered for analysis are loans, advances and investment, and contra accounts. The study provides estimates for the total factor productivity which has shown an upward trend for the period under consideration. The results obtained suggest that the total factor productivity of Pakistan's commercial banks has been increasing since the start of the various banking sector reforms in the 1990s, but growth has followed a fluctuating pattern. It also determines growth for each year and sheds light on the performance of the banking sector in different periods in the light of different phases of reforms. The decomposition of TFP shows that the scale effect is the most critical factor in total factor productivity growth followed by output effect and technical change effect.