An Empirical Investigation of Cost Efficiency in the Banking Sector of Pakistan

This study uses the distribution free approach to estimate levels of cost efficiency of individual banks operating in Pakistan. These levels of efficiency are also analyzed under CAMELS indicators to provide micro insights of their financial standings to justify their prevailing positions. The results show that banks are significantly distinct at different efficiency levels ranging from 87 percent to 49 percent. Technology has played a significant role in reducing the cost of banking industry. However, the banking industry is still operating under diseconomies of scale. Moreover, non-performing loans have adversely impacted the cost structure of banking industry. CAMELS ratios indicate that the most efficient banks are those with lesser amount of non-performing loans, high capital adequacy, lesser non-interest expenditure which leads to high profitability