Profitability and Effectiveness by Means Two Stage DEA Model in Iranian Bank

Author

Department of Industrial Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Abstract

The purpose of this paper is to provide a framework
for evaluating the overall performance of bank branches in terms of
profitability efficiency and effectiveness. Ioannis E.Tsolas (2010) introduced
“Modeling Bank Branch Profitability and Effectiveness by Means
DEA”. But this study has several problems regarding modeling and the
results it claims to be withstanding. In 2010 Kumer and Gulati introduced
a model for performance evaluation. But this study also has a
problem with regard to modeling. We can say that the model introduced
in Tsolas, Kumer and Gulati‘s studies was already introduced by
Ho and Zhu (2004) and Ho (2007). This paper tries to take a close look
at these problems and offer a solution to modify it in a more practical
model. First, we analyze the Ho and Zhu (2004) Ho (2007), Tsolas
(2010), Kumer and Gulati‘s (2010) model and prove them to be incorrect.
Then we apply a modified two stage model proposed by Chen,
Liang and Zhu (2009) in bank branches in Iran. This study aggregates
profitability efficiency and effectiveness into overall performance. In Ho
and Zhu (2004) Ho (2007), Tsolas (2010), Kumer and Gulati‘s (2010)
studies, they assume that profitability efficiency and effectiveness are
independent, and with that assumption, they design a two stage DEA
model. We show that this assumption is wrong, and we cannot design
a two stage DEA model with this assumption. There are some relations
between profitability efficiency and effectiveness which are very important.
Without considering these relations we cannot obtain a superior
insight about the overall performance. Finally, we show that the results
of the modified model are proved to be more accurate than those of
Tsolas, Kumer and Gulati‘s model. This study shows the importance of
profitability efficiency and effectiveness in overall performance of bank
branches in Iran.

Keywords