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

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