Planning and Budgeting

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This paper aims at investigating the efficiency of Irans banking system from the standpoint of cost-efficiency as well as the substitutional and complementary cost factor elasticities. A translog cost function was estimated using panel data from Iran’s banking sector for the years of 2002 to 2007. Factor elasticties, as well as a measurement of the cost efficiency using free distribution approach (FDA) are derived from the translog cost function and factor demand system. Our findings show that there is a reverse relationship between the cost efficiency and the size of banks (based on banks asset). The results of substitutional and complementary cost factor elasticities calculations are also indicative of the human resources-deposits complementary relationship as well as of physical capital substitution with deposits in Iranian banking system. Meanwhile, human recourses and physical capital are less substitutable to each other than physical capital with deposits.

Keywords: Banking Efficiency, Cost Efficiency, Factor Elasticities, Free Distribution Approach (FDA)

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