Impact of ATMs on cost efficiency of Banks: A study of Banks in Pakistan.

1. IMPACT OF ATMs ON COST EFFICIENCY OF BANK:
A STUDY OF BANKS IN PAKISTAN
By
MIRZA MUHAMMAD NASEER
Registration No. 2010-UKIB-10212
A Research Project
Submitted in partial fulfillment of the requirements for the degree of
Bachelor of Commerce (4-years)
in
Finance
Session 2010-2014
Faculty of Commerce, Kotli
University of Azad Jammu and Kashmir, Muzaffarabad, Pakistan
March, 2015

2. I
IMPACT OF ATMs ON COST EFFICIENCY OB BANK:
A STUDY OF BANKS IN PAKISTAN
By
MIRZA MUHAMMAD NASEER
Registration No. 2010-UKIB-10212
A Research Project
Submitted in partial fulfillment of the requirements for the degree of
Bachelor of Commerce (4-years)
in
Finance
Session 2010-2014
Faculty of Commerce, Kotli
University of Azad Jammu and Kashmir Muzzaffarabad
March, 2015

3. II
CERTIFICATION
It is certified that the contents and form of research project entitled “Impact of
ATMs on Cost Efficiency of Bank: A Study of Banks in Pakistan” submitted by
Mirza Muhammad Naseer have been satisfactory for the award of the degree of
B.Com 4years.
Supervisor: _____________________
Dr. Iftikhar Hussain,
Chairman Department of Commerce (UMSIT)
External Examiner: _____________________
Mr. Zafar Iqbal, Assistant Professor (MUST)
Chairman
Department of Commerce
Dean
Faculty of Commerce

4. III
DECLARATION
Except where otherwise acknowledged in the text, this research project
represents the original research of the author. The material contained herein has not
been submitted, either in whole or in part, for a degree at this or any other University.
Copyright © 2015
All rights reserved. No part of the material protected by this copyright notice
may be reproduced or utilized in any form or by any means, electronic or mechanical,
including photocopy, recording or by any information storage and retrieval system
without the permission from the author.
Mirza Muhammad Naseer

5. IV
PLAGIARISM REPORT
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IMPACT OF ATMs ON THE COST EFFICIENCY OF BANKS: A
STUDY OF BANKS IN PAKISTAN by Mirza Muhammad Naseer
From MS Thesis (MS Thesis)
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 ID: 514199784
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6. V
Dedication
I dedicate this study to my lovely and dear family. And also to my
friends and to those who stands with me during harsh time of my life their
contributions always make me able to step up and move towards my
destiny.

7. VI
Acknowledgment
My warm gratitude goes first and foremost to Dr. Iftikhar Hussain, my
supervisor, for his regular support and guidelines. He has walked me through
all the stages of the writing of this research study. Without his steady and
enlightening directions, this project could not have reached its present form.
Secondly thankful to sir M.Asif Khan for his help and guidance which helps
me lot during the project also thanks to Sir Atif Khan for their help and
motivation which matter lot for me.
Lastly my thanks would goes to my beloved family for their loving
considerations and great confidence in me all through these years. I also owe
my sincere gratitude to my friends and my fellow classmates who gave me
their help and time in listening to me and helping me work out my problems
during the difficult course of the project specially to Waseem Abbasi, Adeel
Yosaf and Mosin Manzoor for helping me on each step.
Mirza Muhammad Naseer

8. VII
Abstract
Banks have heap on their adoption and usage of ATMs as a major e-banking
instrument to produce significant contributions to their operations and financial
results. This study examine whether ATM networks has offer positive benefits for
banks in Pakistan by rising their productive efficiency. The link between IT
investment and firm performance has been broadly studied, but a small number of
researchers have study the impact of ATMs on a firm’s cost efficiency. We thus
empirically check the effects of ATMs on cost efficiency of banks in Pakistan.
Numerous prior studies tried to establish the value of ATM investments these though
unsuccessful to present real ATMs investment data that considered the power of its
consumption and as a result, used a dummy variable to indicate whether or not the
ATM investment was made. This practice has made it unfeasible to evaluate the
accurate value of ATM investment. To improve this flawed measure, we use real
ATM numbers and bank operating and financial data to assess the scope of ATM
investment. The broad objective of this study was therefore to analyze the effect of
the ATMs on the cost efficiency of banks in Pakistan. Other factors were also
considered, those are bank size, non-performing loans ratio, number of banks during
period of study and number of ATMs. Number of ATMs, and bank size were found
significant. The results showed that number of ATMs which made positive significant
affect on cost efficiency of banks in Pakistan bank size and non-performing loan are
also significant.

9. VIII
CONTENTS
Title Page I
Certification II
Declaration III
Plagiarism Report IV
Dedication V
Acknowledgment VI
Abstract VII
Contents VIII
1.0 INTRODUCTION 01 – 07
1.1 Introduction 01
1.2 ATMs investment’s determinants 03
1.3 IT investment and banking performance 04
1.4 ATM investment and cost efficiency 04
1.5 Objective of study 06
1.6 Hypothesis 06
1.7 Significance of study 06
1.8 Scope of study 07
2.0 LITERATURE REVIEW 08 – 11
Literature review 08
3.0 RESEARCH METHODOLOGY 12 -14
3.1 Model specification 12
3.2 Population of study 12

10. IX
3.3 Sample of study 12
3.4 Source of data 13
3.5 Time period of study 13
3.6 Data analysis 13
3.7 Dependent variables 13
3.8 Independent variable 14
3.9 Controlling variables 14
4.0 DATA ANALYSIS AND DISCUSSION 15 – 22
4.1 Data Analysis 15
4.1.1 Correlation table 15
4.1.2 Model summary table 16
4.1.3 ANOVA table 16
4.1.4 Coefficient table 17
4.2 Discussion 21
4.2.1 Operating cost rate 21
4.2.2 Asset management cost rate 21
4.2.3 Number of ATMs 21
4.2.4 Bank size 21
4.2.5 Non-performing loans 22
5.0 CONCLUSION & RECOMMENDATIONS 23 – 24
5.1 Conclusion 23
5.2 Recommendations 24
REFERENCES 25 – 27

11. 1
Chapter No. 01
INTRODUCTION
1.1 Introduction
The role of the IT in banking industry is very significant because the banking
industry is highly information sensitive. Banks are also invest in IT for the cost
saving and increase the satisfaction of customers. So there is the need to invest more
on IT. ATM is one kind of IT investment for banks. ATM (Automated Teller
Machine) was introduced in 1970. ATM was introduced to reduce the Burdon of bank
tellers and provide convenience to the customers of bank. ATMs were adopted by the
banks in past and still adopting. ATMs are providing benefits both banks and the
customers. They are providing the benefits to banks by reducing the cost and other
expenses and to customers by providing the facilities of any time withdrawals and
transfer of funds. ATM is a powerful weapon for commercial banks it not only
increases the accuracy of record but also enhance the productivity of bank. ATMs
minimize the errors and process the transactions fast. ATMs enhance the efficiency of
the bank and improve the service quality. Installation of more ATMs will decrease the
amount of work on branches and workforce pays more attention on their work. There
are many studies available on the IT adoption and its impact on banking industry.
Some researchers said that there is no impact of ATM on cost efficiency some
said there is negative impact of ATM on cost efficiency. On the grounds of both these
arguments we cannot favor any of them without any empirical evidence. (Hannan and
Mcdowell, 1984) many others factors like bank size, wage rate also influence this.
Cost efficiency also depend weather the bank is newly established or old bank.
The economies of scale also effect the large size bank can introduce more ATMs and

12. 2
can get benefit but small bank cannot. ATM is very useful to all type of person‟s
weather they are businessmen or common person.
Everything has two faces where there are benefits there are also disadvantages.
Technology benefits to all kind of persons. There are no hard tools or methods
through which we can measure the actual number of ATMs using worldwide.
Although an estimate developed by ATMIA saying the number of ATMs uses
currently over 2.2 million or approximately an ATM is for every 3000 people in the
world. Simply the usage globally by financial institutions can be described as by
dividing the word into 7 regions. From these seven regions four regions U.S.A,
Canada, Europe, and Japan have high numbers of ATMs per millions peoples and low
in other three. There is more demand for ATMs in the Asia/Pacific. The usage of
ATMs in developing countries in has increased greatly during last 15 years. The
benefits of adopting the ATMs is understandable because there are many studies those
provide the theoretical evidence to prove these benefits but they lacking the practical
data.
Purpose of this study is to provide the practical data whether the adoption of
ATMs effecting the productivity of banks or not. There are two disparate effects of
ATM networks. The benefits of ATM sharing are called “network” and „economies of
scale‟ effect (Prager, 1999). The network effect saying that as the number of ATM
increases in network the value to customers also goes up. In the simple words as the
new ATM install the attractiveness of the banks also goes up. The economies of scale
saying that as the more transactions processed the cost per transaction reduced.
Thong and Yap (1995) suggested the factors those effect the IT acceptance for
small businesses. They described that there are two most important modules of

13. 3
variables those are essential in shaping adoption of IT. The first module is individual
CEO attributes, and second module is firm‟s attributes. The three well known
attributes for CEO are novelty, mind set towards IT, and IT familiarity. The two well
known attributes for firm are size of business and aggressiveness toward situations.
Every ATM has two types of cost. One is fixed cost and the other is variable cost.
Variable cost such as the cost of film, paper, etc is directly related with number of
transaction processed while the fixed cost such as cost incurred on purchase of ATM
and leasing cost decline as the number of transaction increase (Saloner & Shepard,
1995).
There are many studies saying that there is impact of ATM on cost efficiency
but most of them are theoretical there are few who having empirical evidence. Some
studies saying that there is no impact of ATM investment on cost efficiency. Some
says the impact is on negative side.
1.2 ATM Investment’s Determinants
Chin S. et al., (2009 ) Pointed out that significant determinants of ATM
investment in the Taiwan banking industry are operating scale, banks deposits
services and operating cost. Hannan and Mcdowell (1984) studied the association
between the decision of making investment in new information technology and the
factors that effect this decision. They experienced that salary level and the size of firm
had encouraging effects on the decision whether to take decision of accepting ATM or
not. The areas where wage rate is high the banks must need to adopt ATM to reduce
the expensive labor. Furthermore with the view of economies of scale theory the
larger bank needs to introduce more ATMs as compare to the smaller banks.

14. 4
Thong and Yap (1995) examined the determinants of adopting information
technology for small businesses. They recommended that two most important module
of variable is important to shaping the decision of adopting information technology.
The first variable is CEO individual‟s characteristics and the other is organizational
characteristics. CEO characteristics are modernization, behavior towards information
technology and knowledge about information technology. The organizational
characteristics are size of business and degree of competitiveness.
1.3 IT Investment and Banks Performance
Past studies found questionable connection between the investment in
information technology and the bank‟s profitability. This relationship could not seems
beneficent in short run because of high initial cost on the information technology
(Furst, Nolle and Robberson, 1998; Furst,Lang and Nolle, 2000;Sullivan, 2000;
Saythe, 2005; De-young, 2006; Siam ,2006) on the other hand modern research
appears more encouraging connection between the IT and the profitability. Milne
(2006) In his study favor this view and said that adoption of new technology help
greatly to improve the profitability of banking in all over the world. Economides and
Salop (1992); Farrell and Saloner (1985) studies showed that implementation of new
technology reduced the operating cost of bank and the facilities of internet technology
accelerate banking methods and help in reducing transaction costs. Past studies do not
show the real picture in the empirical scenario. These studies do not show the
empirical relationship between the IT investment and profitability or performance.
1.4 ATM Installation and Cost Efficiency
There are few studies that showed the connection between ATM installations
and cost efficiency in developing countries however, Batiz-Lazo and Barrie (2005) in
their study said that during the 1990s IT (ATM) in banking sector reduced the

15. 5
operating cost and increased the productivity that result the improvement in
efficiency. The author in his findings said that installation of ATM is profitable for
both banks and customers.
When Pakistani banks adopted the new technology it revolutionized the
banking. The IT continuously serves to banking for boosting their profit as well as
quality. The banks spent million rupees yearly on the information technology
equipments. ATMs have been much-admired to capable for processing regular
transactions and hence a close alternate to Teller labor (Chin-S et al., 2008: Jayamaha
.2008). They confirmed that investment in ATM effect ATM labor replace effect
which lesser the operating cost and so improve their cost efficiency. Labor
replacement arises, as a result, as the use of ATM reduces Tellers' work with the
assistant decrease in labor demand of banks. So banks with weighty personnel
expense stress are likely to install more ATM to replace Teller labor costs.
Chin-S et al., (1980) conclude that ATM intensity has positive effect on bank
cost efficiency. Further, they said that bank size is also positively related to cost
efficiency, though non-performing loans and salary level have negative impact. As for
keeping up of income growing, prior adopters could have cost improvements by
replacing bank tellers with ATM. The conclusion was matching with Laderman
(1990) that ATM could trim down costs of tellers and cost of branch establishment.
The gap is that not only these factors might affect but many others, such as incorrect
investment policy, rising labor expenses, small productivity even with rising ATM
investment. Away from ATMs there are additional kinds of factors that control the
cost efficiency of banks. earlier studies have pointed out that size of bank, level of
salary and the ratio of nonperforming loan also control the cost efficiency of banks
(Chin S et al., 2008) and Girardone et al., 2004). This study is essential because this

16. 6
considering the effects of these factors on the cost efficiency of banks. This study
manage data on the authentic number of ATM, operating data and financial data of
the banks to provide the actual ATMs investment data for assessing the effects of the
ATM investment on cost efficiency of Pakistani banks.
1.5 Objectives of Study
This study measure the impact of ATM investment on the cost efficiency of
the Pakistani banks. This study provides the evidence to the management that their
investment in information technology contribute towards the cost efficiency or not.
And return from this investment increases the cost efficiency or not
1.6 Hypothesis
To achieve the objectives above, we test the following hypothesis
 ATMs installations have positive effect on the cost efficiency of banks in
Pakistan.
 There is no significant effect of non-performing loans on operating cost and assets
management cost of banks in Pakistan
 There is significant effect of bank size on cost efficiency of banks in Pakistan
1.7 Significance of Study
The results from this study would uncover much useful information that is not
only valuable for banks but also for to researchers to understand the connection of
ATM investment and cost efficiency of banks. The results from this study would
support the management while they are going to take decision about the investment in
information technology.

17. 7
1.8 Scope of Study
The study carried out on top ten banks of Pakistan. The study covers the five
years period from 2009 to 2013. This period has chosen because major advancement
in the field of IT takes place during this period.

18. 8
Chapter No. 02
Literature Review
Literature Review
For the measurement of the productive efficiency there are two approaches
followed: parametric and non-parametric. The parametric approach describes the
production functions of units produced. Then, using econometric techniques,
deviations from the maximum feasible output are determined and separated into
random noise and in efficiency components. In contrast, non-parametric methods use
linear programming to construct an efficient frontier from the observed input–output
combinations of firms. In efficiency is then measured as the distance between the
firms observed input– output combination and the frontier. Nonparametric approaches
make no assumptions about the functional form of the production function and
construct the frontier based solely on observed data (Lovell, 1993). Each approach has
one significant advantage and one significant disadvantage compared to the other.
Parametric approaches try to distinguish between noise and inefficiency, whereas
non-parametric methods make no such attempt and lump both together as
inefficiency. In this sense, their results can be biased due to the presence of noise.
However, non-parametric approaches do not require any assumptions about the
production function and they are less prone to biases that arise from specification
errors. Efficiency measures obtained by a parametric method can be in danger to
errors associated with assumptions about the functional form of the production
technology and the random error terms.
There are a few other practical advantages of non-parametric methods. For
example, nonparametric methods are preferable for studies with small sample sizes.
Because parametric methods are based on econometric techniques, employing such

19. 9
methods on a small sample may not correctly separate random noise from
inefficiency. Another reason to employ non-parametric methods has been presented
by Ataullah et al. (2004), who argue that market imperfections in developing
countries can result in distorted input/output prices, making it harder to measure cost
or profit functions using parametric techniques. Another advantage of the non-
parametric approach is that it can allow for zero output values, which parametric
methods can not deal with (Grabowski et al., 1994). Furthermore, despite being
extremely sensitive to outliers, non-parametric methods can, in principle, handle zero
input values as well. However, if such observations are included in the sample, it
becomes necessary to employ alternate specification of the model and compare the
efficiency scores to check for the accuracy of the results (Favero and Papi, 1995 and
Resti, 1997).
ATM has positive impact on the cost efficiency of the bank. The others
variables like salary level, bank size, non-performing loans and bank age also have
potential influence on the operating efficiency of the bank. For this purpose the actual
data from branches collected and empirical evidence through statistical model used
for proving the data. And concluded that ATM have positive effect on cost
efficiency.(Ou, Hung, Yen, & Liu, 2006). Muhammad (2010) conducted a study on
the major scope of ATM service eminence and its consequence on customer
satisfaction in Pakistan. Through the questionnaire he collects the data from the
handiness sample of five hundred customers of domestic and international banks. The
results of regression indicated that convenience, well-organized process, security and
privacy, consistency and openness are significant scope of ATM service quality and
that ATM service quality positively and appreciably contributes toward customer
satisfaction.

20. 10
Muhammad (2010) suggested in an empirical done study, that large number of
bank customers prefer to use self service delivery system. It therefore follows that the
execution of the ATMs provides the banking to compete with industry and the way to
adoption of new technology. Di Angeli et al. (2002) in his study about the adoption of
technology in different cultures and analyze it according to the Hoffsted‟s cultural
dimensions. The data collected from urban India. He says most customers‟
inhabilitate to adopt the new technology. These inhibitors could be traced back to a
few main factors, such as feelings of insufficiency, liking for human contact, not have
of necessitate and safety concerns. They think that the people those use the ATM they
are using because they are in need of it. These factors are influence on technology
adoption because of different cultures values. They take these things according to
their cultures context their values and beliefs. So there is much impact of culture
dimensions on the adoption of new technology. Holden and El-Bannany (2004)
explored whether IT investment influence bank profitability in the UK. The results
confirm that the number of ATM installed by a bank had a encouraging impact on
bank profitability. The value of ATMs was in improving the teller‟s output, increasing
branch service value, and growing the branch deposit market. Automated teller
machine is novel type of providing modern services to the customers like withdrawals
of cash, transfer of funds, deposits of cash, utility bills payment, cheque book request
and other financial inquires (Muhammad, 2010). Information technology reduced
operating cost of banks and advancement in internet technology assist and accelerate
bank actions to accomplished identical and lower value added transactions(
Economides & Salop, 1992 ). Nuruddeen (2008) explained that only two years has
passed and the banks customers begin to feel secure about ATMs but due to new
threats and hackers the customers feeling in secure and their confidence towards the

21. 11
ATM declined. The customers scared to lose their savings by hackers through hacking
of their account. On the one hand where the ATM provides benefits but also comes
with the threats of losing their savings too. Santiago and Francisco (2008)
investigated the interface between Automated Teller Machines (ATMs) and Point of
Sales (POS) devices as well as the effects of these relations on the whole demand for
currency in Australia. It was found that the escalation of ATMs negatively affect POS
adoption which, in turn, recommend that the promotion of cards relative to cash is
weaken by the co-existence and joint promotion of these two rival technologies.
Additionally, the researchers give estimation about the effects of these technologies
on the demand for currency, viewing that POS devices and higher debit and credit
POS transactions may extensively trim down the demand for currency and offset the
negative effects that the deployment of ATMs and ATM usage may have on the
demand for currency. Ellen (2009) in her study suggested that major conciliation of
business association and card processors is analysis on the main motive of payment-
card fraud. A survey conducted by the Actimize. A security firm sponsor Actimize for
this survey. Survey team said that 94% of the 113 financial-services firms could
outline some proportion of payment-card fraud they experienced straight back to mass
compromises of networks.

22. 12
Chapter No. 03
Research Methodology
3.1 Model Specification
Multiple regressions were used to check cause and effect relationship.
Regression model explained impact of independent variables on dependent variable.
The following equation was used to explain the impact of independent variables that
is ATM installed and controlling variables on dependent variable that is Cost
efficiency. For the measurement of cost efficiency we use operating cost rate (OCR)
and asset management rate (AMCR) as dependent variable
OCR = β0+ βX1+ βX2+ βX3 + ε ………………… Model I
AMCR = β0+ βX1+ βX2+ βX3 + ε ………………. Mode II
Where
OCR = Operating Cost Rate
AMCR = Asset Management Cost Rate
X1 = Number of Automated Teller Machines
X2 = Bank Size
X3 = Nonperforming Loans Ratio
ε = Error factor
3.2 Population of the Study
The study population consisted of 37 banks of Pakistan from which 5 public
sector banks 22 local private banks 6 foreign banks and 4 specialized banks.
3.3 Sample of the Study
Top ten banks schedule bank of Pakistan are taken as the sample of study.

23. 13
3.4 Source of Data
Secondary data are used and taken from the annual reports of the related banks
and from Financial Statement Analysis of Financial Sector 2009-2013 issued by State
Bank of Pakistan.
3.5 Time Period of Study
From 2009 to 2013
3.6 Data Analysis
The analysis of data made through the SPSS by applying Pearson correlation, t
test, f test, ANOVA and multiple regression
3.7 Dependent Variable
In this study our dependent variable is Cost Efficiency. For the measurement
of cost efficiency we use operating cost rate and asset management rate as dependent
variable and defined following:
3.7.1 Operating Cost Rate ( OCR )
Operating Cost Rate = OE/TR
Where
OE = Operating Expenses
TR = Total Revenue
The operating Cost Rate (OCR) measure the cost efficiency of the bank operational
activities. As the results of this measure increases the efficiency of operational
activities decreases.
3.7.2 Asset Management Cost Rate ( AMCR)
AMCR = OE/ TA
Where
OE = Operating Expense

24. 14
TA = Total Asset
AMCR (asset management cost rate) measure the efficiency of asset
management activities. Same like OCR as the AMCR measure increases the decrease
in asset management efficiency.
3.8 Independent Variable
The main independent variable is the number of ATMs (NATMs) installed by
the banks.
3.9 Controlling Variables
Apart from impact of ATM on cost efficiency there are some other variables
involved those are controlling variable and are following
3.9.1 Bank Size
BS = log (TA)
Where
BS = Bank Size
TA = Total Assets
3.9.2 Non Performing Loan Ratio
NPLR = NPL/TL
Where
NPLR = Non Performing Loan Ratio
NPL = Non Performing Loan
TL = Total Loans

25. 15
Chapter No. 03
Data Analysis and Discussion
4.1 Data Analysis
4.1.1 Correlation Table
Pearson correlation will show the existing connection among variables that are
demonstrated in the table of correlation.
Correlations
OCR NATM BS NPLR
Pearson
Correlation
Operating Cost Rate 1.000 .032 -.174 .278
Number of ATMs .032 1.000 .602 -.091
Bank Size -.174 .602 1.000 .053
Non-Performing Loans
Ratio
.278 -.091 .053 1.000
Sig. (1-tailed) Operating Cost Rate . .412 .113 .025
Number of ATMs .412 . .000 .265
Bank Size .113 .000 . .358
Non- Performing Loans
Ratio
.025 .265 .358 .
N Operating Cost Rate 50 50 50 50
Number of ATMs 50 50 50 50
Bank Size 50 50 50 50
Non- Performing Loans
Ratio
50 50 50 50

26. 16
There is a positive relation between operating cost rate and asset management
cost rate. The non performing loan and the number of ATMs are positively correlated
with operating cost rate while bank size is negatively correlated with operating cost.
4.1.2 Model Summary Table
Model Summary
Model R
R
Square
Adjusted
R Square
Std. Error of
the Estimate
Change Statistics
R Square
Change
F
Change
df1 df2
Sig. F
Change
1 .401a
.161 .106 .8716233 .161 2.937 3 46 .043
a. Predictors: (Constant), Number of ATMs, Non- Performing Loans Ratio, Bank Size
In the model summery table adjusted R square is .106 which shows that
overall ten percent changeability in operating cost rate is explained by the model. The
little variation between R Square and Adjusted R Square supports that correlated
variables are considered in mode. It indicates operating cost rate is not significantly
controlled by bank size, non-performing loans and number of ATMs.
4.1.3 ANOVA Table
ANOVAb
Model Sum of
Squares
Df Mean Square F Sig.
1 Regression 6.695 3 2.232 2.937 .043a
Residual 34.947 46 .760
Total 41.642 49
a. Predictors: (Constant), Number of ATMs, Non- Performing Loans Ratio, Bank Size
b. Dependent Variable: Operating Cost Rate

27. 17
ANOVA table reveals the fitness of model the final column of this table shows
the p value. If p value is < .050 then the model has the power to predict the impact of
independent variable on dependent variable. The table p value is .043 < .050 shows
that we chose the right variables for model.
4.1.4 Coefficient Table
The table describes the relationship between bank size, non-performing loans,
number of ATMs and operating cost rate with respected coefficients. If p values <
0.050 then the concern variable it has significant impact on dependent variable.
Coefficientsa
Model Unstandardized
Coefficients
Standardized
Coefficients
T Sig.
B Std. Error Beta
1 (Constant) 7.439 3.580 2.078 .043
Number of ATMs .001 .001 .277 1.619 .112
Bank Size -1.370 .653 -.358 -2.097 .042
Non- Performing Loans
Ratio
7.077 3.010 .322 2.351 .023
a. Dependent Variable: Operating Cost Rate
Unstandardized Coefficients B shows that increase of one unit in bank size
brings 1.370 decreases in operating cost rate holding non-performing loans and
number of ATMs constant. p value of bank size which is .042 < 0.050 indicate that it
has statistically significant impact. Non-performing loans brings about 7.077 unit
positive change in operating cost and its p value that is .023 < 0.050 shows that it has
statistically significant impact. Number of ATMs brings about .001 positive change in

28. 18
operating cost and its p value .112 > .050 shows that it has statistically insignificant
impact. Standard coefficient beta indicates the one unit change in bank size, non-
performing loans and number of ATMs brings respectively -.358, .322 and .277
change in operating cost rate.
Correlations
Assets
Management
Cost Rate
Number
of
ATMs
Bank
Size
Non-
Performing
Loans Ratio
Pearson
Correlation
Assets Management Cost Rate 1.000 -.356 -.376 .536
Number of ATMs -.356 1.000 .602 -.091
Bank Size -.376 .602 1.000 .053
Non- Performing Loans Ratio .536 -.091 .053 1.000
Sig. (1-tailed)
Assets Management Cost Rate . .006 .004 .000
Number of ATMs .006 . .000 .265
Bank Size .004 .000 . .358
Non- Performing Loans Ratio .000 .265 .358 .
N
Assets Management Cost Rate 50 50 50 50
Number of ATMs 50 50 50 50
Bank Size 50 50 50 50
Non- Performing Loans Ratio 50 50 50 50
The correlation table shows the relationship among the variables. Asset
management cost rate and operating cost rate are positively correlate with each other.
Banks size and number of ATMs are negatively correlated with asset management
cost rate and non-performing loans ratio positively correlated with asset management
cost rate.

29. 19
Model Summary
In this table Adjusted R Square which is .421 means that 42% variability in
dependent variable asset management cost rate is explained by model.
Model Summary
Model R
R
Square
Adjusted
R Square
Std. Error of
the Estimate
Change Statistics
R Square
Change
F Change df1 df2
Sig. F
Change
1 .676a
.457 .421 .0051340 .457 12.900 3 46 .000
a. Predictors: (Constant), Number of ATMs, Non- Performing Loans Ratio, Bank Size
The table says that bank size, non-performing loans and number of ATMs
have 42 percent driving influence on asset management cost rate. The little variation
between R Square and Adjusted R Square supports that correlated variables are
considered in model. It indicates Asset management cost rate is significantly
controlled by bank size, non-performing loans and number of ATMs.
ANOVAb
Model Sum of Squares Df Mean Square F Sig.
1 Regression .001 3 .000 12.900 .000a
Residual .001 46 .000
Total .002 49
a. Predictors: (Constant), Number of ATMs, Non- Performing Loans Ratio, Bank Size
b. Dependent Variable: Assets Management Cost Rate
The ANOVA table discloses the suitability of model. The final column of this
table shows the p value. If p value is > .050 then the model has the power to predict

30. 20
the impact of independent variable on dependent variable. The table p value is .000 >
.050 shows that the selection of variables is proper.
Coefficientsa
Model Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std. Error Beta
1 (Constant) .075 .021 3.545 .001
Number of ATMs -2.535E-6 .000 -.098 -.710 .482
Bank Size -.010 .004 -.346 -2.518 .015
Non- Performing
Loans Ratio
.088 .018 .545 4.951 .000
a. Dependent Variable: Assets Management Cost Rate
The coefficient table illustrates the relationship between bank size, non-
performing loans, number of ATMs and Asset Management cost rate with respected
coefficients. If p value < 0.050 then the concerned variable has significant impact on
dependent variable. Unstandardized Coefficients B shows that increase of one unit in
bank size brings .010 negative changes in asset management cost rate considering
non-performing loans and number of ATMs constant. The p value of bank size which
is .015 < 0.050 signify that it has statistically significant impact. Non-performing
loans brings about .088 unit positive change in Asset management cost rate and its p
value that is .000 < 0.050 confirm that it has statistically significant impact. Number
of ATMs brings about 2.535 negative change in Asset management cost rate and its p
value .482 > .050 confirm that it has statistically insignificant impact. Standard
coefficient beta indicates the one unit change in bank size, non-performing loans and
number of ATMs brings respectively -.346, .545 and -.098 change in Asset

31. 21
4.2 Discussion
4.2.1 Operating Cost Rate
Operating cost is the one of dependent variable in the coefficient table
independent variables are number of ATMs, bank size and non-performing loan and
dependent variables are operating cost efficiency and asset management cost rate. The
number of ATMs and non-performing loans are positively correlated with operating
cost rate and bank size is negatively correlated.
4.2.2 Asset Management Cost Rate
Asset management cost rate is the one of dependent variable in the coefficient
table independent variables are number of ATMs, bank size and non-performing loan
and dependent variables are operating cost efficiency and asset management cost rate.
The number of ATMs and bank size loans are negatively correlated with asset
management cost rate and mom-performing loans ratio is positively correlated.
4.2.3 Number of ATMs
Number of ATMs in positively correlated with operating cost rate and
negatively correlated with asset management cost rate. The significant negative result
indicate that bank utilize ATMs to achieved the objective of good asset management
efficiency. We can conclude the empirical results of number of ATMs confirm our
hypothesis that ATM has positive effect on cost efficiency of banks in Pakistan.
4.2.4 Bank size
In the model we use to show the effect of bank size on the cost efficiency of
bank. The coefficient of bank size were .042 on operating cost rate and .015 on asset
management cost rate which shows that bank size significantly affect the cost
efficiency of bank. Increase of one unit of bank size causes negative change in the
operating cost rate and also in asset management cost rate. So our hypothesis that

32. 22
bank size has significant effect on cost efficiency approved. This is why because large
banks have the cost advantage and more operating cost efficiency then the small
banks. Large banks generally adequate capital and superior planning of asset
management. Hence it can be concluded that size of bank positively affect asset
management efficiency. As a result the bank cost efficiency and asset management
efficiency gets better with rising bank size
4.2.5 Non-Performing Loans Ratio
Non-performing loan ratio must be controlled because they have considerable
effect on efficiency of bank. Banks needs to pay valuable attention while processing,
examining and managing nonperforming loan then that of performing loans. If ratio of
non-performing loans of one bank exceeded from other the quality of loan may also
be affected. In the view of Girardone et al. (2004), non-performing loan ratio is
commonly positively related inefficiency of banks. From the regression results the
coefficient was .023 and significantly positive at level 7.07 showing that non-
performing loan negatively affected the bank operating cost rate and asset
management cost rate and hence it prove our hypothesis the non-performing loans
have negative effect on cost efficiency of banks in Pakistan.

33. 23
Chapter No. 05
Conclusion and Recommendation
5.1 Conclusion
For getting the competitive edge all banks needs to make investment in new
information technology and adopt the new IT equipment this could help them in
effectively and efficiently manage the cost. All banks needs to take aggressive
decision for adoption of new IT equipment like ATMs and lower their operating costs.
The results from the study show the impact of ATM installations on cost efficiency of
banks in Pakistan. Apart from the number of ATMs which made positive significant
affect on cost efficiency of banks of Pakistan bank size and non-performing loan are
also significant in contribution. In first model only 10 percent of change in operating
cost rate is due to the number of ATMs, non-performing loans ratio and bank size and
many other factors are outside the model and should be there. While in the second
model the change in asset management cost is 42 percent is determined by Number of
ATMs, non-performing loans and bank size. All this shows that banks should consider
these variables for cost efficiency.
On the basis of above study the following conclusion can be drawn. The
automations bring positives changes in cost efficiency of the banks. It not only
provide the facilities to customers but also gave the banks reason to invest in the field
if IT. The studied banks mostly influenced by these variables if a bank use the ATMs
it cause the cost efficiency of the bank. The banks that can afford the ATMs can
surely invest in it. The ATM is substitute to the teller labor and can improve the
quality of the records. This study also shows that investment in the ATM causes
efficiency in operating cost rate and also asset management cost rate of the banks of

34. 24
Pakistan. This study also reveals that bank size and non-performing loans are also the
considerable effect on cost efficiency of the banks.
5.2 Recommendations
As a result of the above findings and conclusions, the following recommendations
were made:-
 Banks in Pakistan should persist to install ATMs as a strategic instrument for
enhanced cost efficiency
 Banks need to focus on areas of IT and chose the right area for getting the
beneficent of cost efficiency
 Banks should build up their management for making better decision related to
non-performing loans and best utilize them.
 Bank should manage their size and make efforts to improve cost efficiency.
 The larger bank should invest in IT more and more for getting optimum level of
cost efficiency.
 The bank should install more ATMs for reducing the Burdon of branches and
allow the customers to manage their accounts themselves

35. 25
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