Recent research reveals that government-owned banks in Pakistan exhibit greater efficiency compared to private banks, prioritizing long-term societal benefits over the profit-driven approach of their private counterparts.
Published in the prestigious Nature journal, the study titled ‘Analyzing Digital Technology Impact on Efficiency in Pakistan’s Commercial Banking Industry’ underscores how strategic decision-making by state-controlled banks enhances their operational effectiveness over time.
Muhammad Mateen Naveed, one of the researchers, emphasized the role of government banks like the National Bank of Pakistan in funding socioeconomically impactful projects, contrasting them with profit-centric initiatives typical of private institutions.
“Government projects aim at long-term gains, such as infrastructure development, which contrasts sharply with the short-term profit orientation of private banks,” Mr. Naveed explained during a phone interview from Beijing, where he pursues his PhD.
The research drew insights from a comprehensive dataset covering 29 commercial banks from 2006 to 2020, spanning significant economic events including the 2008 financial crisis, the initiation of the China-Pakistan Economic Corridor, and the COVID-19 pandemic.
It highlighted that amid fluctuating economic conditions, Pakistani banks, particularly private ones, often park liquidity in government securities for risk-free, high-profit returns. This strategic shift intensified amidst record-high interest rates in recent years, leading private banks to lend substantial funds to the government.
Mr. Naveed’s study aimed to provide empirical evidence on how digitalization has bolstered the efficiency of Pakistani banks, leveling the playing field for less efficient banks over time. He noted that while banking sector studies traditionally focus on risk factors and competition, the impact of digital technologies remains underexplored.
“Our study utilized real-world data on internet-based, ATM, and point-of-sale transactions to assess their influence on banking efficiency,” Mr. Naveed elaborated.
The findings indicated that Pakistani banks achieved an overall technical efficiency of 74% and a scale efficiency of 96%, with room for improvement noted in optimizing resource utilization across banking branches.
Furthermore, the research underscored the transformative impact of digital transactions, affirming that ATM, internet-based, and point-of-sale transactions significantly enhance banking efficiency by reducing operational costs and improving service delivery.
Looking forward, the study highlighted Pakistan’s evolving financial landscape, noting the increasing role of electronic money institutions and the imperative for banks to fortify digital infrastructures in compliance with regulatory guidelines.
As digital payments continue to gain prominence, the banking industry in Pakistan appears poised for enhanced efficiency through extensive digitalization efforts, signaling a pivotal shift in the sector’s operational dynamics.
