Efficiency in the Malaysian Banking Industry
Hon, Lee Yoong, Tuck, Cheah Eng, Yu, Koay Lin, Journal of Southeast Asian Economies
The Malaysian banking industry has experienced major consolidation and restructuring over the past five years since the implementation of the Financial Sector Masterplan (FSMP) in 2001. (1) The objective of the FSMP is "to develop a more resilient, competitive and dynamic financial system with best practices, that supports and contributes positively to the growth of the economy throughout the economic cycle, and has a core of strong and forward looking domestic financial institutions that are more technology driven and ready to face the challenges of liberalization and globalization." The FSMP was initiated as a response to the recognition by the government that changing economic and business environment as well as rapid technological advances will have significant impact on the Malaysian financial system. In this respect, the FSMP has provided guidelines for the technological development of domestic banks so that they may successfully compete with foreign banks upon the liberalization of the Malaysian banking sector. Ultimately, the ability to reap the benefits arising from greater competition from foreign banks depends largely on how well the domestic banks change and adapt to compete. As of 2009, more than 90 per cent of the recommendations under the FSMP have been implemented, with the initiated reforms and capacity-building measures in the plan having resulted in more resilient financial institutions in the country. (2)
According to the IMF (1999), the Asian financial crisis was infected by the domestic policy weaknesses, including weaknesses in the domestic financial system. The World Bank (1998) reported that the vulnerability of the banking sectors for nations affected by the crisis was due to poor risk management policies and excessive lending. The excessive lending was mainly because of cross-ownership of banks and companies, weak enforcement of bank regulations and government directed lending, which resulted in large non-performing loans and insolvent financial institutions that subsequently had to be financially supported, merged or liquidated.
At the end of 2000, there were thirty-one commercial banks (of which fourteen are fully foreign owned), nineteen finance companies, twelve merchant banks and seven discount houses in the Malaysian financial system. Upon the completion of the merger programme prompted by the FSMP, the number of domestic banking institutions was to be reduced to ten domestic banking groups, consisting of ten commercial banks, ten finance companies and nine merchant banks.
In early 2000, the government approved substantial consolidation of the banking industry into ten anchor banks. Following this, the FSMP was launched in March 2001 by Bank Negara Malaysia to chart the future direction of the financial sector over the next ten years. Part of the recommendations of the FSMP was to encourage mergers among the domestic banking institutions and the forming of strategic alliances with other banking and non-banking institutions especially in the form of equity alliances. This was expected to strengthen the domestic banks and encourage better efficiency and resilience in the banking system.
In this paper, we employed a data envelopment analysis (DEA) approach to examine the relative efficiencies of the ten local banks from the years 2001 to 2005, five years following the FSMP. In addition, the Malmquist Productivity Indices provided the productivity analysis on these banks over the same five-year period.
The objective of this study is to understand if the recommendations of the FSMP have indeed stimulated the banks to become more efficient. We also aim to analyse the components that contribute to these changes, whether it is technology, management improvements or scale effects. The analysis is also extended to looking at the size of the banks (local) and the impact on their efficiencies. Incidentally, as we pass the fifth year, this study comes at a time when the need to review the performance of local banks may be crucial in learning more about the issues towards realizing the ultimate aim of the FSMP. …