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JEL Classification System

G21, G32, E31, E32

Abstract

The efficiency of commercial banking is a crucial determinant of the longevity of the financial system. High credit risk is a significant feebleness that leads to high non-performing loans (NPLs), which reduce banking efficiency in any economy. In this context, this study aims to identify the determinants of banking inefficiency in Bangladesh. The Data Envelopment Analysis (DEA) technique was employed to measure banking efficiency, whereas TOBIT regression was performed to identify the determinants of inefficiency of 38 commercial banks from 2016–2022. Findings demonstrated size, ownership structure and orientation, capital structure regulations (BASEL III), GDP growth, and inflation as significant determinants of Bangladeshi banking inefficiency. However, although the non-performing loan ratio posited a deteriorating factor to banking efficiency, it was statistically insignificant. Similarly, the COVID-19 pandemic was not a significant determinant of banking inefficiency. The findings suggest that bank managers should strengthen their risk management assessments, particularly to reduce NPLs and adjust Basel III capital requirements to achieve higher efficiency scores. Besides, policymakers are required to improve BASEL III requirements to strike a balance between bank efficiency and financial stability by deregulating capital requirements while encouraging banks to improve their credit risk management.

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