KARACHI: A new research has found that government banks in Pakistan are more efficient than private banks, with the former focusing on long-term gains and opposed to the profit-driven approach of the latter.

The research paper, titled ‘Analysing the impact of digital technology diffusion on the efficiency and convergence process of the commercial banking industry of Pakistan’, was published last week in the Nature journal, also states that the strategic decision-making of government banks helps improve their efficiency over time.

“In Pakistan, SCBs [state-controlled banks] facilitate socioeconomic growth, banking access, and several industries within the country. Strategic, growth-oriented investments allow Pakistani SCBs to increase their EFF [efficiency] over time.”

These results were derived from the study of a dataset of the performance of 29 commercial banks, including private banks, SCBs, Islamic banks, special purpose banks and foreign banks from 2006 to 2020 — covering the 2008 financial crisis, the initiation of the China-Pakistan Economic Corridor project, the coronavirus pandemic and post-pandemic recovery.

Study provides empirical evidence that digitisation has positive effect on financial institutions’ performance

Muhammad Mateen Naveed, one of the researchers, told Dawn that SCBs like the National Bank of Pakistan and banks owned by provincial administrations fund government programmes.

“Government projects aren’t profit-oriented but rather for social welfare … These projects have long-term gains, for example, building a bridge or any other infrastructure. The dividends from these projects aren’t achieved in the short term,” Mr Naveed told Dawn over the phone from Beijing, where he is pursuing his PhD.

The findings are validated by the prevalent practices of Pakistan’s commercial banks, which prefer parking their liquidity in government securities to earn risk-free and high profits. With interest rates at record highs over the past few years, private banks opened their coffers to lend money to the government as private sector borrowing plunged.

Digitalisation impact on banking efficiency

Mr Naveed said his research aimed to provide empirical evidence of how digitalisation improved the efficiency of Pakistani banks and how technological advancements helped low-efficient banks catch up with their high-performing peers over time.

He reasoned that research studies on the banking sector mostly analyse risk factors, competition, and the impact of R&D on performance. The influence of digital technologies on financial institutions’ performance is an understudied phenomenon.

“We based our study on the real-[world] data about internet-based transactions, ATM transactions and point-of-sale transactions to check whether the factors influence banks’ efficiency or not.”

The study estimated that Pakistani banks’ overall technical efficiency was 74 per cent, while their scale efficiency was 96pc.

The pure technical efficiency — the ability of bank managers to extract optimum performance from given resources — of banks came out at 77pc.

This means that if bank managers have Rs100, they are only able to utilise Rs77, Mr Naveed said, adding that basically, our banking managers are performing 23pc below their optimum performance levels.

The scale efficiency of 96pc demonstrates that different components of the banking system, for example, branches, are underutilising their potential by 4pc.

The assessment of three parameters of digitalisation showed that ATM transactions have a “highly significant and positive effect on Pakistan’s banking industry” as ATMs now offer more than just cash withdrawals and deposits.

“Customers might deposit, withdraw, and check balances at ATMs. By broadening their service offerings, banks can better satisfy client demands and reduce branch visits, enhancing banking efficiency.”

The impact of internet-based transactions also had a “positive relationship” with banking efficiency.

“Internet transactions are less costly and require fewer staffers to handle financial data and operations than conventional banking […] reducing the necessity for costly branch networks. Cost reductions increase banking efficiency because of more efficient resource utilisation and streamlined operations,” the research stated

Finally, POS-based transactions also have a “positive association” with efficiency as they reduce handling costs, speed up payment processing, and “improve precision, protection, and interaction with other business networks”.

The research also highlighted the changing landscape of Pakistan’s financial system with the entry of electronic money institutions (EMIs). It added that banks are also investing more in their digital infrastructures to comply with SBP’s guidelines on digital payments.

“New digital payment alternatives, such as quasi-FinTechs, are increasing digital penetration in Pakistan [and the] banking industry appears to be becoming more efficient due to extensive banking digitalisation.”

Published in Dawn, June 30th, 2024