Profit Efficiency and Competition in the Commercial Banks of Pakistan

This study examines the impact of banking sector reforms on the structure of banking sector and profit efficiency of commercial banks in Pakistan by using data from 1990-2009. This study also explores the impact of financial intermediation development on regional per capita income and income inequality through human capital development. We use dynamic generalized method of moment (GMM) to Panzar and Rosse (1987) total revenue equation. We find that banking sector in Pakistan is monopolistically competitive. Moreover we estimate the alternative profit function by using DFA and panel models. Results of efficiency indicate that banks are operating inside the efficiency frontier that also shows the misallocation of financial resources. Furthermore, correlates of efficiency are determined by considering bank specific, macroeconomic variables and banking reforms index to check the efficiency differences among banks. We estimate Tobit regression by employing maximum likelihood method. There exists a positive relation between banking sector reforms and profit efficiency.