Malmquist Index and Technical Efficiency of Philippine Commercial Banks in the Post-Asian Financial Crisis Period

Abstract

Following the Asian financial crisis in 1997, the Philippine banking system improved its productivity and efficiency.  The paper examines the Malmquist index and technical efficiency scores of Philippine commercial banks for the post-crisis period employing data envelopment analysis (DEA) approach.  Using a balanced panel of 35 banks, the time-varying Malmquist index shows that on average, banks improved their productivity by 4.6% annually from 1998 to 2005.  Technological change or innovation dominated and offset the decay in the catch-up effect component of the index.  The technological frontier shift of 110% for the 8-year period is largely driven by the innovation undertaken by banks to accommodate e-banking as well as build ATM and network infrastructure, in both in-site and off-site locations, with local banks outperforming the foreign banks in this aspect.  Efficiency change or the catch-up component has been decreasing by 5.6% annually, suggesting that banks have been actually falling behind in management-influenced productivity rather than catching up.  DEA results on technical efficiency show that majority of banks exhibit decreasing returns to scale.  Universal banks are more technically efficient than plain commercial banks, providing evidence for scope economies.