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

Abstract

The purpose of this paper is to provide a framework<br />for evaluating the overall performance of bank branches in terms of<br />profitability efficiency and effectiveness. Ioannis E.Tsolas (2010) introduced<br />“Modeling Bank Branch Profitability and Effectiveness by Means<br />DEA". But this study has several problems regarding modeling and the<br />results it claims to be withstanding. In 2010 Kumer and Gulati introduced<br />a model for performance evaluation. But this study also has a<br />problem with regard to modeling. We can say that the model introduced<br />in Tsolas, Kumer and Gulati‘s studies was already introduced by<br />Ho and Zhu (2004) and Ho (2007). This paper tries to take a close look<br />at these problems and offer a solution to modify it in a more practical<br />model. First, we analyze the Ho and Zhu (2004) Ho (2007), Tsolas<br />(2010), Kumer and Gulati‘s (2010) model and prove them to be incorrect.<br />Then we apply a modified two stage model proposed by Chen,<br />Liang and Zhu (2009) in bank branches in Iran. This study aggregates<br />profitability efficiency and effectiveness into overall performance. In Ho<br />and Zhu (2004) Ho (2007), Tsolas (2010), Kumer and Gulati‘s (2010)<br />studies, they assume that profitability efficiency and effectiveness are<br />independent, and with that assumption, they design a two stage DEA<br />model. We show that this assumption is wrong, and we cannot design<br />a two stage DEA model with this assumption. There are some relations<br />between profitability efficiency and effectiveness which are very important.<br />Without considering these relations we cannot obtain a superior<br />insight about the overall performance. Finally, we show that the results<br />of the modified model are proved to be more accurate than those of<br />Tsolas, Kumer and Gulati‘s model. This study shows the importance of<br />profitability efficiency and effectiveness in overall performance of bank<br />branches in Iran.