Pakistan Institute of Development Economics



X-efficiency, Scale Economies, Technological Progress, and Competition: The Banking Sector in Pakistan

The financial sector plays an important role in economic growth, and the banking sector as a part of the financial sector facilitates the economic activities in the capacity of an intermediary between lender and borrowers. That is why the researchers as well as the policy-makers have been concerned with the issue of banking sector efficiency. The banks transform their various inputs into multiple financial products, and the efficient way the banking sector transform these input into financial products may followed by macroeconomic stability [Ngalande (2003)]. It has also important role in effective execution of monetary policy [Hartman (2004)], furthermore, efficient allocation by banks play a central role in economic growth [Galbis (1977)]. There is a strong empirical support for positive link between financial intermediation and economic growth. A wide acceptance of this link also exists and financial development used as a determinant in growth model over the past several decades [Gurley and Shaw (1955) and Goldsmith (1969)]. The positive relationship could be either through factor accumulation or through increase in efficiency [Collins (2002)]. It is the efficiency which is more important because mere factor accumulation could not stimulate economic growth [Slutz (2001)]. The efficient financial intermediation mechanism allocates the credit to more productive sectors in optimal way. In addition, this efficient financial intermediation mechanism also promotes innovations, because of high return on investment, with positive implications for economic growth [Luccheti (2000)].