Size and Total Factor Productivity Change in Malaysian Non-Commercial Banking Financial Institutions: A Non-Parametric Malmquist Productivity Index Analysis

By Sufian, Fadzlan | International Journal of Business and Society, January 2007 | Go to article overview

Size and Total Factor Productivity Change in Malaysian Non-Commercial Banking Financial Institutions: A Non-Parametric Malmquist Productivity Index Analysis


Sufian, Fadzlan, International Journal of Business and Society


ABSTRACT

The paper attempts to investigate productivity changes of the Malaysian Non-Commercial Banking Financial Institutions (NCBFI) during the post merger period of 2001-2004 by applying the non-parametric Malmquist Productivity Index (MPI) method. The empirical findings suggest that Malaysian NCBFI have exhibited productivity regress during this period due to efficiency decline rather than technological regress. The results also suggest that the finance companies have exhibited productivity growth due to technological progress, while the merchant banks on the other hand, were found to have exhibited productivity decline during all years due to technological regress. The relationship between different NCBFI size and productivity indicates that the majority of Malaysian NCBFIs which experienced productivity growth attributed to technological progress are large NCBFIs, while the majority of NCBFIs that experienced productivity decline due to technological regress belonged to the small NCBFI group. However, the results reject the divisibility theory, which suggests that there is no size advantage accrued to the larger NCBFI, implying that the small NCBFI group with its limited capabilities is disadvantaged compared to its larger counterparts in terms of technological advancements.

Keywords: Non-commercial banking financial institutions; Productivity change; Malmquist productivity index.

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

Given the substantial task of a non-commercial banking financial sector, it is worth raising the issue of why it matters. Since Gerschenkron (1962) classic study emphasized the role of the banking systems in the economic development of Germany, France and Italy in the nineteenth 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-Commercial Banking Financial Institutions (NCBFI) 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 honoured, 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, that is, 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 NCBFI. In general, NCBFI play a 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 NCBFI 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 minimising financial fragility in the developing economies may be to encourage a diverse financial markets and institutions, where investors are able to assume a variety of risks outside the banking system itself. …

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