Measuring Efficiency of Bangladeshi Leasing Firms and Exploring Its Relationship With Profitability: A Study Applying DEA in Variable Return to Scale

Literature Review

Charnes et al. (1978) in their study described scalar measure of efficiency of non-profit organizations as well as formulated a method for estimating weight in case of multiple input- multiple output firm. Russell (1985) in his study provides necessary conditions for measuring technical efficiency of a firm. Schneider (1993) analyzed profitability and cost efficiency of all sized Austrian firms. Author found that for smaller firms, profitability was positively associated with labor cost efficiency and firm size did not have significant impact on productivity. Asghar et al. (2012) studied on revealing significant factors that affect Pakistani leasing companies’ profitability. Research found that asset size, net investment and current ratio were positively related with profitability. Keramidou et al. (2013) in their study explored the relationship between efficiency and profitability of meat processing companies in Greece. Study found that profitability of the companies were low and there was absence of strong positive association between efficiency and profitability. Hussain et al. (2012) analyzed the profitability and efficiency of 9 Malaysian Islamic banks and they found wide fluctuations in ROA, ROE, ROD etc. among the banks as well as from one year to another. Although in case of some banks, profitability ratios became negative, the efficiency score of six banks were more than 0.8 in every year from 2004-2008. Baten and Hasan (2014) estimated technical, allocative and cost efficiency of some Bangladeshi leasing companies using DEA model. Study found that the firms are poor in allocative efficiency which implies that input price ratios of acquired resources are not appropriate. Moreover, large deviation is seen between highest and lowest cost efficient firm. Study of Huda (2014) showed that lease contribution in revenue portion of leasing firms improving day by day which signifies the efficiency of managing the lease business properly. Afza and Asghar (2014) in their study examined the efficiency level of Pakistani modaraba and leasing companies and compared the different efficiency dimensions between the two categories during 2005 to 2010 using SFA technique. Study found that modaraba companies were in a better position than leasing firms in cost efficiency dimension although technical efficiency was comparatively low. It indicates that modaraba companies’ input price ratios were more appropriate than leasing firms but leasing firms were able to generate more output using same input.