Evaluating Efficiency of Malaysian Banks Using Data Envelopment Analysis

Abstract

Data Envelopment Analysis (DEA) Approach is used to estimate the overall, pure technical and scale efficiencies for Malaysian commercial banks during the period 2000-2006. The results suggest that domestic banks were relatively more efficient than foreign banks. Our results also suggest that domestic banks' inefficiency were attributed to pure technical inefficiency rather than scale inefficiency. In contrast, foreign banks inefficiency is attributed to scale inefficiency rather than pure technical inefficiency. The study further examines whether the domestic and foreign banks are drawn from the same environment by performing a series of parametric and non-parametric tests. The results from the parametric and non-parametric tests suggest that for the years 2000-2004, both domestic and foreign banks possessed the same technology whereas results for 2005 and 2006 suggest otherwise. This implies that banks in recent years have had access to different and more efficient technology.

Technological lnnovation in Services and the Efficiency of Malaysian Commercial Banks

“…It is obvious that most of the foreign banks are relatively inefficient compared to their local counterparts in 2004. This result is consistent with Tahir et al (2009aTahir et al ( , 2009b. Both HSBC and OCBC banks have scored a very low relative technical inefficient in year 2004 mainly due to relatively low pure technical efficiency scores.…”

“…This result is consistent with the previous literature, including Sufian (2004), Mohd. Azmi et al (2006), and Tahir et al (2009aTahir et al ( , 2009b. With technological services as inputs, we documented that foreign banks in general are relatively inefficient compared to local Malaysian banks somewhat consistent with Tahir et al (2009aTahir et al ( , 2009b, but after the Malaysia government ended its capital control in 2005, the gap has been gradually closing.…”

“…They conclude that bank size does matter in improving bank efficiency and more importantly, and the negative growth of technical efficiency signal the needs of higher utilization of technology among the Malaysian local banks. The result is occurred by Tahir et al (2009aTahir et al ( , 2009b who expanded the sample to include foreign banks over the sample of 2000-2006 periods. They find that the source of inefficiency of the locally-owned commercial banks in Malaysia is due to pure technical inefficiency.…”

“…The main source of foreign banks inefficiency is due to scale inefficiency. Tahir et al (2009aTahir et al ( , 2009b however only covered three monetary variables; i.e. total deposits and total overhead expenses as their inputs and total earning assets as their output.…”

Efficiency measurement of the banking sector in the presence of non-performing loan

“…In the Malaysian banking sector, the DEA approach for measuring the efficiency of a bank was carried out by Tahir et al [14] without incorporating the undesirable output. The study suggested that the domestic banks were relatively more efficient than foreign banks.…”