The Efficiency and Productivity of Malaysian Banks: An Output Distance Function Approach

Posted: 31 May 2012

See all articles by Mariani Abdul-Majid

Mariani Abdul-Majid

Universiti Kebangsaan Malaysia - School of Economics, Faculty of Economics and Management

David S. Saal

Aston University - Aston Business School

Giuliana Battisti

Warwick Business School

Date Written: August 25, 2008

Abstract

This study employs stochastic frontier analysis to analyze Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in outputs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalised Malmquist productivity index. On average, Malaysian banks experience mild decreasing return to scale and annual productivity change of 2.37 percent, with the latter driven primarily by technical change, which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. In addition, our productivity estimates indicate that the potential for full-fledged Islamic banks and conventional banks with Islamic banking operations to overcome the output disadvantages associated with Islamic banking are relatively limited. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had an interim output-increasing effect in 1998, the crisis prompted a continuing negative impact on the output performance by increasing the volume of non-performing loans.

Keywords: Output distance function, Stochastic frontier analysis, Malmquist productivity index, Islamic banking

JEL Classification: D24, G21

Suggested Citation

Abdul-Majid, Mariani and Saal, David S. and Battisti, Giuliana, The Efficiency and Productivity of Malaysian Banks: An Output Distance Function Approach (August 25, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1256093

Mariani Abdul-Majid (Contact Author)

Universiti Kebangsaan Malaysia - School of Economics, Faculty of Economics and Management ( email )

UKM Bangi, Selangor 43600
Malaysia
++6 03 8921 5789 (Fax)

David S. Saal

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Giuliana Battisti

Warwick Business School ( email )

Scarman road
Coventry CV4 7AL
United Kingdom

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