A comparative study on ranking the banks using Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) approach

ABSTRACT: One of the necessary tools for economic development of a country is an efficient banking system. In this study, two methods of performance evaluation including data envelopment analysis (DEA) and stochastic frontier analysis (SFA) techniques were investigated to determine the best technique having more potential in explaining the performance of banks. For this purpose, a sample of 10 banks in Iran, namely Melli, Tejarat, Saderat, Mellat, Maskan, Keshavarzi, Sanat O Madan, Pasargadae, Karafarin and Saman was studied as the statistical research community (within five years from 2005 to 2010). In the DEA application, the input variables were: the number of branches, total deposits and total costs, and the output variables were: the volume of granted facilities, total investments and total income of banks. However, in the SFA application, the variables of investments, granted facilities, deposits in other banks and activities outside of the balance sheet were the inputs and labor costs, capital costs and total costs were the outputs. The results showed a significant relationship between the two efficiency analyzing approaches and the SFA approach showed a higher accuracy.