Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan

The Pakistani banking system has been transformed over the past 15 years through liberalization, the entry of private banks, the privatization of public-sector banks, and the tightening of prudential regulations. The effects of these changes on bank productivity and relative efficiency are investigated using various techniques. Bank productivity in terms of profits has increased, and new entrants have been efficient, but the dispersion of efficiency remains wide. The privatized banks improved their profit efficiency in the period immediately following their privatization, but in the subsequent years only one significantly improved its efficiency, whereas the other did not differentiate itself in terms of efficiency from the remaining state-owned banks. The new private domestic banks generally proved to be among the most efficient, and sometimes out-performed the foreign banks.