A Novel Approach to Evaluating Bank Branch Performance: Integrating Financial Ratios and Data Envelopment Analysis (DEA)

Abstract

The banking system has a direct and reciprocal relationship with economic growth; thus, improving the efficiency of banks contributes significantly to sustainable economic development. Efficiency can be defined in various ways—for instance, a fully efficient organization utilizes 100% of its potential. Efficiency is typically assessed from technical, allocative, and economic perspectives, using both basic and advanced methods. In manufacturing firms, final outputs are usually tangible and well-defined. However, in the banking sector, outputs are less concrete and depend on how a bank’s role is conceptualized. Two major perspectives define the function of banks: first, as financial intermediaries—where inputs include labor, capital, and deposits, and outputs comprise loans and other income-generating assets; and second, as service providers—where inputs remain labor and capital, but outputs include deposits, loans, and other financial services. This study evaluates the efficiency of bank branches using two distinct approaches: financial ratios and Data Envelopment Analysis (DEA). The findings highlight and compare the strengths and limitations of each method, providing a comprehensive view of branch performance.