Size and Total Factor Productivity Growth of Non-Bank Financial Institutions: Evidence from Malaysia
Sufian, Fadzlan, South Asian Journal of Management
This paper investigates productivity changes of Malaysian Non-bank Financial Institutions (NBFIs), during the post-crisis period of 2001-2004 by applying the non-parametric Malmquist Productivity Index (MPI) method, which allows us to examine five different indices namely, the Total Factor Productivity Change (TFPCH), Technological Change (TECHCH), Efficiency Change (EFFCH), Pure Technical Efficiency Change (PEFFCH) and Scale Efficiency Change (SECH) indices. The results suggest that Malaysian NBFIs have exhibited productivity progress during all years under study. The decomposition of the productivity change index suggests that Malaysian NBFIs productivity progress were mainly attributable to efficiency change rather than technological change during 2002 and 2003, while the opposite was true during 2004. The author examines the productivity progress/regress of different NBFI groups operating in Malaysia. The findings suggest that while the merchant banks' productivity increase are mainly attributed to technological change, the opposite is true for the finance companies, which exhibit productivity regress mainly due to technological regress. The paper explores the relationship between different NBFIs size and productivity. The results indicate that while the majority of Malaysian NBFIs, which experienced productivity progress due to technological change, came from the large NBFIs group, the majority of NBFIs that experienced productivity regress due to technological regress came from the small NBFIs group. The results imply that the small NBFIs group with its limited capabilities has lagged behind its larger counterparts in terms of technological advancements.
Given the substantial task of a non-bank financial sector, it is worth raising the issue of why it matters. In particular, since Gerschenkron (1962) classic study emphasized the role of the banking systems in the economic development of Germany, France and Italy in the 19th century, it may appear that the need for a non-bank financial sector is largely redundant in the specific circumstances of the developing economies. However, there are two main reasons why the existence of Non-bank Financial Institutions (NBFIs) matters: One concerns economic development, and the other relates to financial stability.
In the first place, banks offer assets (deposits) that claim to be capital certain. If this promise is to be honored, then there must be limits to the range and nature of assets that a bank can reasonably take on to its balance sheets. Notwithstanding the existence of universal banking in many parts of the world (i.e., banks also engaged in securities market activities), this consideration implies that bank-based financial system will tend to have a smaller range of equity-type assets than those with a more broadly based structure including a wide range of NBFIs. More generally, NBFIs play range of roles that are not suitable for banks and through their provision of liquidity, divisibility, informational efficiencies, and risk pooling services, they broaden the spectrum of risks available to investors. In this way, they encourage and improve the efficiency of investment and savings. Through the provision of a broader range of financial instruments, they are able to foster a risk management culture by attracting customers who are least able to bear risks and fill the gaps in financial services that otherwise occur in bank-based financial systems.
secondly, from the view of financial stability, in a financial sector in which NBFIs are comparatively undeveloped, banks will inevitably be required to assume risks that otherwise might be borne by the stock market, collective investment schemes or insurance companies. However, there is basic incompatibility between the kinds of financial contracts offered by the banks and those offered by the financial institutions. Thus, banks are more likely to fail as a result. One way of minimizing financial fragility in the developing economies may be to encourage a diversity of financial markets and institutions, where investors are able to assume a variety of risks outside the banking system itself. …