Consolidation and efficiency: Evidence from non-bank financial institutions in Malaysia

Sufian, Fadzlan and Abdul Majid, Muhamed Zulkhibri (2007): Consolidation and efficiency: Evidence from non-bank financial institutions in Malaysia.

Abstract

This paper investigates the efficiency changes of finance and merchant banking institutions in Malaysia, during and post-consolidation periods by applying the non-parametric Data Envelopment Analysis (DEA). The evidence suggests that pure technical efficiency is more related to overall efficiency than scale efficiency. On average, 28.7% of finance and merchant banking institutions are operating at CRS, while the majority are scale inefficient. Our results from the Tobit regression analysis further confirmed that the level of equity capital is positively related with the level of efficiency gain. Financial institutions with higher ratio of loans to assets are related to higher level of efficiency. This might reflect the degree of market power exists in the loan markets compared to the other product markets with institutions developed their strategic niche within the market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Non-Bank Financial Institutions, Data Envelopment Analysis (DEA), Malaysia, Tobit
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Aly, H.Y., R., Grabowski, C., Pasurka, and N. Rangan, 1990, ‘Technical, Scale and Allocative Efficiencies in U.S. Banking: An Empirical Investigation’, Review of Economics and Statistics,Vol. 72 (2), pp. 211-218.

Avkiran, N.K., 1999, ‘An Application Reference for Data Envelopment Analysis in Branch Banking: Helping the Novice Researcher’, International Journal of Bank Marketing, Vol.17 (5), pp. 206-220.

Avkiran, N.K. 2002, Productivity Analysis in the Service Sector with Data Envelopment Analysis. Camira: N.K., Avkiran.

Bank Negara Malaysia 2004, Annual Report. Kuala Lumpur.

Banker, R.D., A., Charnes, and W.W., Cooper, 1984, ‘Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis’, Management Science, Vol. 30 (9), pp. 1078-1092.

Bauer, P.W., A.N., Berger, G.D., Ferrier, and D.B., Humphrey, 1998, ‘Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods’, Journal of Economics and Business, Vol. 50 (2), pp. 85-114.

Berger, A.N. and D.B., Humphrey, 1997, ‘Efficiency of Financial Institutions: International Survey and Directions for Future Research’, European Journal of Operational Research, Vol. 98 (2), pp. 175-212.

Bhattacharya, A., C.A.K., Lovell, and P., Sahay, 1997, ‘The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks’, European Journal of Operational Research, Vol. 98 (2), pp. 332-45.

Canhoto, A. and J., Dermine, 2003, ‘A Note on Banking Efficiency in Portugal: New vs. Old. Banks’, Journal of Banking and Finance, 27 (11), pp. 2087-2098.

Charnes, A., W.W., Cooper, and E., Rhodes, 1978, ‘Measuring the Efficiency of Decision Making Units’, European Journal of Operational Research, Vol.2 (6), pp. 429-44.

Charnes, A., W.W., Cooper, Z.M., Huang, and D.B., Sun, 1990, ‘Polyhedral Cone – Ratio DEA Models with An Illustrative Application to Large Commercial Banks’, Journal of Econometrics, Vol.46 (1-2), pp. 73-91.

Chilingerian, J.A., 1995 Evaluating Physician Efficiency in Hospitals: A Multivariate Analysis of Best Practices, European Journal of Operational Research, Vol.80, pp. 548-574.

Coelli, T., D.S., Prasada-Rao, and G.E., Battese, 1998, An Introduction to Efficiency and ProductivityAanalysis. Boston: Kluwer Academic Publishers.

Cooper, W.W., L.M., Seiford, and K., Tone, 2000, Data Envelopment Analysis. Boston: Kluwer Academic Publishers.

Dyson, R.G., R., Allen, A.S., Camanho, V.V., Podinovski, C.S., Sarrico, and E.A., Shale, 2001, ‘Pitfalls and Protocols in DEA’, European Journal of Operational Research, Vol. 132 (2), pp. 245-259.

Elyasiani, E. and S., Mehdian, 1992, ‘Productive Efficiency Performance of Minority and Non-minority Owned Banks: A Non-Parametric Approach’, Journal of Banking and Finance, Vol.16 (5), pp. 933-948.

Evanoff. D.D. and P.R., Israelvich, 1991, ‘Productive Efficiency in Banking’, Economic Perspectives, Federal Reserve Bank of Chicago, pp. 11-32.

Favero, C. and L., Papi, 1995, ‘Technical Efficiency and Scale Efficiency of in the Italian Banking System: A Non-parametric Frontier Approach’, Applied Economics, Vol. 27 (4), pp. 385-395.

Ferrier, G. and C.A.K., Lovell, 1990, ‘Measuring Cost Efficiency in Banking: Econometric and Linear Programming Evidence’, Journal of Econometrics, Vol. 46 (1-2), pp. 229-45.

Fried, H.O., C.A.K., Lovell, and P.V., Eeckaut, 1993, ‘Evaluating the Performance of U.S. Credit Unions’, Journal of Banking and Finance, Vol. 17 (2-3), pp. 251-65.

Grifell–Tatje, E. and C.A.K., Lovell, 1997, The Sources of Productivity Change in Spanish Banking, European Journal of Operational Research, Vol. 98 (2), pp. 364-80.

Hasan, I. and K., Marton, 2000, ‘Development and Efficiency of the Banking Sector in A Transitional Economy’, Working Paper, Stern School of Business, New York University.

Humphrey, D.B., 1985, Cost and Scale Economies in Bank Intermediation, in, Aspinwall, R., Eisenbeis, R. (eds.), Handbook for Banking Strategy. New York: John Wiley and Sons.

Isik, I. and M.K., Hassan, 2002, ‘Technical, Scale and Allocative Efficiencies of Turkish Banking Industry’, Journal of Banking and Finance, Vol. 26 (4), 7 pp. 19-766.

Jackson, F.M. and M.D., Fethi, 2000, ‘Evaluating the Technical Efficiency of Turkish Commercial Banks: An Application of DEA and Tobit Analysis’, Departmental Working Paper, Leicester: University of Leicester.

Kirjavainen, T. and H.A., Loikkanen, 1998, ‘Efficiency Differences of Finnish Senior Secondary Schools: An Application of DEA and Tobit Analysis’, Economics of Education Review, Vol. 17(4), pp. 377-394.

Kumbhakar, S. C. and A., Lozano-Vivas, 2005, ‘Deregulation and Productivity: The Case of Spanish Banks’, Journal of Regulatory Economics, Vol.27 (3), pp. 331-351.

Luoma, K., M-L., Järviö, I., Suoniemi, and R.T., Hjerppe, 1996, ‘Financial Incentives and Productive Efficiency in Finnish Health Centers’, Health Economics, Vol. 5, pp. 435-445.

Maddala, G.S., 1983, Limited Dependent and Quantitative Variables in Econometrics, New York: Cambridge University Press.

McAllister, P.H. and D.A., McManus, 1993, ‘Resolving the Scale Efficiencies Puzzle in Banking’, Journal of Banking and Finance, Vol.17 (2-3), pp. 389-405.

Miller, S.M. and A.G., Noulas, 1996, ‘The Technical Efficiency of Large Bank Production’, Journal of Banking and Finance, Vol.20 (3), pp. 495-509.

Sathye, M., 2001, ‘X-Efficiency in Australian Banking: An Empirical Investigation’, Journal of Banking and Finance, Vol. 25 (3), pp. 613-30.

Sealey, C. and J.T., Lindley, 1977, ‘Inputs, Outputs and A Theory of Production and Cost at Depository Financial Institutions’, Journal of Finance Vol.32 (4), pp. 1251-1266.

Sherman, H.D. and F., Gold, 1985, ‘Bank Branch Operating Efficiency: Evaluation with Data Envelopment Analysis’, Journal of Banking and Finance, Vol.9 (2), pp. 297-315.

Sufian, F. and S., Ibrahim, 2005, “An Analysis of the Relevance of Off-balance Sheet Items in Explaining Productivity Change in Post-merger Bank Performance: Evidence from Malaysia” Management Research News, 28(4), 74-92.

Tobin, J., 1958, ‘Estimation of Relationships for Limited Dependent Variables’, Econometrica, Vol.26, pp. 24-36.