Analysing banks’ intermediation and operational performance using the Hicks–Moorsteen TFP index: The case of Iran

•A unique application of the Hicks–Moorsteen TFP index to the banking industry in Iran.•Public banks dominated in the post-reform era under the intermediation approach.•Private banks were superior using the operating (revenue based) approach.•Scale inefficiency is found to be the key reason for the industry's inefficiency overall.•Deregulation of the banking industry has potential to further increase productivity.

In order to analyse the impact of policy reforms on the performance of the banking sector in Iran we present a decomposition of the Hicks–Moorsteen Total Factor Productivity (TFP). This entails a comparison of both the intermediate and operating performances of different types of banks in the pre- and post-reform eras. Our results show that under the intermediation approach, state-owned banks (public banks) were considerably more efficient than private banks in the post-regulation period. In contrast, under the operating approach, private banks were fully technically efficient and mix efficient in both pre and post-reform eras. This paper highlights the importance of analysing performance from multiple perspectives. The findings reflect public banks’ mission to maximise loans to target groups while private banks are motivated more by financial profit.

Graphical abstractUsing the Hicks–Moorsteen Total Factor Productivity (TFP) index, we analysed both intermediation and operational performance of banks in Iran over the period 2003–2008. We find that irrespective of which approach is considered, the industry experienced TFP progress in 2004–2007 and a significant TFP deterioration thereafter.Figure optionsDownload full-size imageDownload as PowerPoint slide