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

Subject Areas : Business Strategy

Morteza  Shafiee ¹ (Department of Industrial Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran)

Received: 2014-07-20 Accepted : 2014-09-20 Published : 2015-07-01

Keywords: Data Envelopment Analysis (DEA), Banking, process efficiency, Organizational Effectiveness, Banks, Banks Performance,

Abstract :

The purpose of this paper is to provide a frameworkfor evaluating the overall performance of bank branches in terms ofprofitability efficiency and effectiveness. Ioannis E.Tsolas (2010) introduced“Modeling Bank Branch Profitability and Effectiveness by MeansDEA”. But this study has several problems regarding modeling and theresults it claims to be withstanding. In 2010 Kumer and Gulati introduceda model for performance evaluation. But this study also has aproblem with regard to modeling. We can say that the model introducedin Tsolas, Kumer and Gulati‘s studies was already introduced byHo and Zhu (2004) and Ho (2007). This paper tries to take a close lookat these problems and offer a solution to modify it in a more practicalmodel. 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 aggregatesprofitability efficiency and effectiveness into overall performance. In Hoand Zhu (2004) Ho (2007), Tsolas (2010), Kumer and Gulati‘s (2010)studies, they assume that profitability efficiency and effectiveness areindependent, and with that assumption, they design a two stage DEAmodel. We show that this assumption is wrong, and we cannot designa two stage DEA model with this assumption. There are some relationsbetween profitability efficiency and effectiveness which are very important.Without considering these relations we cannot obtain a superiorinsight about the overall performance. Finally, we show that the resultsof the modified model are proved to be more accurate than those ofTsolas, Kumer and Gulati‘s model. This study shows the importance ofprofitability efficiency and effectiveness in overall performance of bankbranches in Iran.