Efficiency and Competition in the Malaysian Banking Market: Foreign versus Domestic Banks
Abstract
The aim of this paper is to investigate efficiency performance of Malaysian banking market using data envelopment analysis approach in the context of the increasing presence of foreign banks. Specifically, two measures of efficiency are constructed, cost and profit efficiency by utilizing bank-level data of Malaysian commercial banks, over the period 2003 to 2014. The results obtained show the domestic banks are more efficient than the foreign banks counterparts for both measures of efficiency. Next, the Lerner Index approach is employed to measure competition and finally, Granger causality tests are undertaken to answer the question, does competition foster efficiency? The results of causality tests support a positive effect of competition on cost and profit efficiency of Malaysian banks. With regard to the financial liberalization, the findings imply that higher competitive pressure may be offset the market power of individual banks; however, eventually it will results in efficiency gains of Malaysian banks.
Keywords
DOI: 10.22146/gamaijb.6106
References
Abd-Majid, M. S., and F. Maulana. 2012. A comparative analysis of the productivity of Islamic and conventional mutual funds in Indonesia: Data envelopment analysis (DEA) and general least square (GLS) Approaches. Gadjah Mada International Journal of Business 14 (2): 183–208.
Angelini, P., and Cetorelli. N. 2003. The effects of regulatory reform on competition in the banking industry. Journal of Money, Credit, and Banking 35 (5): 663-684.
Bain, J. S. 1951. Relation of profit rate to industry concentration: American manufacturing, 1936-1940. The Quarterly Journal of Economics 65 (3): 293-324.
Barajas, A., S. Roberto, and S. Natalia. 2000. The impact of liberalization and foreign investment in Colombia’s financial sector. Journal of Development Economics 63: 157–196.
Baumol, W. J. 1982. Contestable market: An uprising in the theory of market structure. The American Economic Review 7 (1): 1-15.
Berg, S. A., and M. Kim. 1994. Oligopolistic interdependence and the structure of production in banking: An empirical evaluation. Journal of Money, Credit, and Banking 26 (2): 309-322.
Berger, A. N. 1995. The profit-structure relationship in banking: Tests of market power and efficient structure hypotheses. Journal of Money, Credit, and Banking 27: 404-431.
Berger, A.N., and R. DeYoung. 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21: 849-870.
Berger, A. N., and D. B. Humphrey. 1992. Megamergers in banking and the use of cost efficiency as an antitrust defense. Antitrust Bulletin 37: 541-600.
Berger, A. N., and D. B. Humphrey. 1997. Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research 98: 175–212.
Berger, A. N., and L. J. Mester. 2003. Explaining the dramatic change in performance of US banks: Technological change, deregulation, and dynamic changes in competition. Journal of Financial Intermediation 12: 57-95.
Berger, A. N., R. DeYoung, H. Genay, and G. F. Udell. 2000. Globalization of financial institutions: Evidence from cross-border banking performance. Brookings-Wharton Papers on Financial Services 3: 23-120.
Bureau Van Dijk IBCA. 2000. Bank Scope Database. New York: Bureau Van Dijk IBCA.
Casu, B., and C. Giradone. 2006. Bank competition, concentration, and efficiency in the single European market. The Manchester School 74 (4): 441-468.
Casu, B., and C. Girardone. 2009. Testing the relationship between competition and efficiency in banking: A panel data analysis. Economics Letters 105: 134–137.
Central Bank of Malaysia. 1999. The Central Bank and the Financial System in Malaysia - A Decade of Change. Kuala Lumpur: Central Bank of Malaysia.
Central Bank of Malaysia. 2015. The 2014 Bank Negara Malaysia Annual Report. Kuala Lumpur: Central Bank of Malaysia.
Charnes, A., W. W. Cooper, and E. Rhoades. 1978. Measuring the efficiency of decision making units. European Journal of Operational Research 2: 429 - 444.
Chinn, M. D. and H. Ito. 2006. What matters for development economics? Journal of Development Economics 81 (1): 163-192.
Chung, Y., R. Fare, and S. Grosskopf. 1997. Productivity and undesirable outputs: A directional distance function approach. Journal of Environmental Management 51: 229-240.
Claessens, S. 2009. Competition in financial sector: Overview of competition policies. World Bank Research Observer 24 (1): 83–118.
Claessens, S., and L. Laeven. 2004. What drives bank competition? Some international evidence? Journal of Money, Credit, and Banking 36: 562-583.
Claessens, S., and L. Laeven. 2005. Financial dependence, banking sector competition, and economic growth. Journal of the European Economic Association 3 (1): 179–207.
Claessens, S., and N. van Horen. 2013. Foreign banks: Trends and impact. Journal of Money, Credit and Banking 46 (1) (February): 295-326.
Claessens, S., A. Demirguc-Kunt, and H. Huizinga. 2001. How does foreign entry affect domestic banking markets? Journal of Banking and Finance 25: 891–911.
Clarke, G., R. Cull, M. Soledad, M. Peria, and S. Sa´nchez. 2001. Foreign bank entry: Experience, implications for developing countries, and agenda for further research. Policy Research Working Paper Series 2698. The World Bank.
Crystal, J. S., B. G. Dages, L. and L. S. Goldberg. 2002. Has foreign bank entry led to sounder banks in Latin America? Federal Reserve Bank of New York Current Issues in Economics and Finance 8 (1).
Dages, B. G., L. S. Goldberg, and D. Kinney. 2000. Foreign and domestic bank participation in emerging markets: Lessons from Mexico and Argentina. Federal Reserve Bank of New York Economic Policy Review 6 (3): 17–36.
de la Torre, A., M. S. Martinez-Peria, and S. Schmukler. 2010. Bank involvement with SMEs: Beyond relationship lending. Journal of Banking and Finance 34: 2280-93.
Demsetz, H. 1973. Industry structure, market rivalry, and public policy. Journal of Law and Economics 16 (1): 1-9.
Denizer, C. A., M. Dinc, and M. Tarimcilar. 2000. Measuring banking efficiency in the pre- and post-liberalization environment: Evidence from the Turkish banking system. Policy Research Working Papers Series 2476. The World Bank.
Detragiache, E. and P. Gupta. 2004. Foreign banks in emerging market crisis: Evidence from Malaysia. IMF Working Paper WP 04/129. International Monetary Fund.
Dogan, E., and D. K. Fausten. 2003. Productivity and technical change in Malaysian banking: 1989-1998. Asia Pacific Financial Markets 10: 205-237.
Fang, Y., I. Hasan, and K. Marton. 2011. Bank efficiency in South-Eastern Europe. Economics of Transition 19 (3): 495-520.
Fernández de Guevara, J., J. Maudos, and F. Pérez. 2005. Market power in European banking sector. Journal of Financial Services Research 27 (2): 109 - 37.
Grigorian, D. A., and V. Manole. 2002. Determinants of commercial bank performance in transition: An application of data envelopment analysis. IMF Working Paper No. 02/146. International Monetary Fund.
Grossman, S., and O. Hart. 1983. An analysis of the principal-agent problem. Econometrica 51: 7-45.
Hasan, I., and K. Marton. 2003. Development and efficiency of the banking sector in a transitional economy: Hungarian experience. Journal of Banking and Finance 27 (12): 2249-2271.
Havrylchyk, O. 2006. Efficiency of the Polish banking industry: Foreign versus domestic banks. Journal of Banking and Finance 30: 1975-1996.
Hermes, N., and V. Nhunq. 2008. The impact of financial liberalization on bank efficiency: Evidence from Latin America and Asia. Applied Economics 42 (26): 1-21.
Hicks, J. R. 1935. Annual survey of economic theory: The theory of monopoly. Econometrica 3 (1): 1-20.
Isik, I., and M. K. Hasan. 2002. Technical, scale, and allocative efficiencies of Turkish banking industry. Journal of Banking and Finance 26: 719-766.
Isik, I., and M. K. Hasan. 2003. Efficiency, ownership, and market structure, corporate control and governance in the Turkish banking industry. Journal of Business Finance and Accounting 30 (9 and 10): 1363-1421.
Jeon, B. M., and J. Wu. 2014. The role of foreign banks in monetary policy transmission: Evidence from Asia during the crisis of 2008-09. HKIMR Working Paper No. 01/2014, Hong Kong Institute for Monetary Research.
Jeon, B. N., M. P. Olivero, and J. Wu. 2011. Do foreign banks increase competition? Evidence from emerging Asia and Latin America. Journal of Banking and Finance, 35 (4): 856-875.
Klein, M. 1971. A theory of banking firm. Journal of Money, Credit, and Banking 7: 205-218.
Koetter, M., J. W. Kolari, and L. Spierdijk. 2008. Testing the ’quiet life’ of U.S. banks with adjusted Lerner indices. Proceedings of Federal Reserve Bank of Chicago (May): 234-252.
Koeva, P. 2003. The performance of Indian banks during financial liberalization. Working Paper No. 150. International Monetary Fund.
Kose, A.M., and E. S. Prasad, and M. E. Terrones. 2009. Does openness to international financial flows raise productivity growth? Journal of International Money and Finance 28 (4): 554-580.
Kraft, E., R. Hofler, and J. Payne. 2006. Privatization, foreign bank entry and bank efficiency in Croatia: A Fourier-flexible function stochastic cost frontier analysis. Applied Economics 38: 20-75.
Leibenstein, H. 1966. Allocative efficiency ‘versus x-efficiency. American Economic Review 56: 392-415.
Lensink, R., A. Meesters, and I. Naaborg. 2008. Bank efficiency and foreign ownership: Do good institutions matter? Journal of Banking and Finance 32: 834–844.
Levy-Yeyati, E., and A. Micco. 2007. Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk. Journal of Banking and Finance 31: 1633-1647.
Liao, C. S. 2010. Are foreign banks in developing countries more productive? The case of Taiwan. Journal of International and Global Economic Studies 3 (2): 63-74.
Lindgren, C. J., J. T. Tomás, C. E. Baliño, A. M. Gulde, M. Quintyn, and L. Teo. 1999. Financial sector crisis and restructuring: Lessons from Asia. Occasional Paper 188, International Monetary Fund.
Mason, E. S. 1939. Price and production policies of large-scale enterprises. American Economic Review 29: 61-74.
Matthews, K., and M. Ismail. 2006. Efficiency and productivity growth of domestic and foreign commercial banks in Malaysia. Working Paper No. E2006. Cardiff Business School.
Maudos, J., and J. Fernández de Guevara. 2007. The cost of market power in banking: Social welfare loss vs. cost inefficiency. Journal of Banking and Finance 31 (7): 2103-2125.
McKinnon, R. 1973. Money and Capital in Economic Development. Washington DC: Brookings Institution.
Mlambo, K., and M. Ncube. 2011. Competition and efficiency in the banking sector in South Africa. African Development Review 23 (1): 4–15.
Mlima, A. Z., and L. Hjalmarrson, L. 2002. Measurements of inputs and outputs in the banking industry. Tanzanet Journal 3 (1): 12-22.
Moguillanski G., R. Studart, and S. Vergara. 2004. Foreign banks in Latin America: A paradoxical result. CEPAL Review 82: 19-35.
Mohd-Tahir, I., N. M. Abu-Bakar, and S. Haron. 2010. Cost and profit efficiency of the Malaysia commercial banks: A comparison between domestic and foreign banks. International Journal of Economics and Finance 2 (1): 186-197.
Monti, M. 1972. Deposit, credit, and interest rate determination under alternative bank objectives. In Szego, G.P. and Shell, K. (Eds.). Mathematical Methods in Investment and Finance. Amsterdam: North-Holland.
Morgan, D. P., and P. E. Strahan. 2004. Foreign bank entry and business volatility: Evidence from U.S. states and other countries. In Ahumada, L. A., J. R. Fuentes, and N. Loayza (Series Editor) and Klaus Schmidt-Hebbel (Ed.). Banking Market Structure and Monetary Policy. Chile: Central Bank of Chile: 241-270.
Njie, M. 2006. The impact of financial liberalization on bank spreads in Malaysia. Journal of Economic Cooperation 27 (3): 163 194.
Okuda, H., and H. Hashimoto. 2004. Estimation cost functions of Malaysian commercial banks: The differential effects of size, location and ownership. Asian Economic Journal 18 (3): 233-259.
Olivero, M. P., Y. Li, and B. N. Jeon. 2009. Consolidation in banking and the lending channel of monetary transmission: Evidence from Asia and Latin America. Working Paper. LeBow College of Business, Drexel University.
Omar, M. A., M. S. Abd-Majid, and R. Rulindo. 2007. Efficiency and productivity performance of the national private banks in Indonesia. Gadjah Mada International Journal of Business 9 (1): 1–18.
Ong, T. S., Y. T. Lim, and B. H. Teh. 2011. A comparison on efficiency of domestic and foreign banks in Malaysia: A DEA approach. Business Management Dynamics 1 (4): 33-49.
Peltzman, S. 1977. The gains and losses from industrial concentration. Journal of Law and Economics 20: 229-63.
Pruteanu-Podpiera, A., L. Weill, and F. Schobert. 2008. Banking competition and efficiency: a micro-data analysis on the Czech banking industry. Comparative Economic Studies 50: 253–73.
Saez-Fernandez, F. J., A. J. Picazo-Tadeo, and M. Beltrán-Esteve. 2015. Assessing the performance of the Latin American and Caribbean banking industry: Are domestic and foreign banks so different? Cogent Economics and Finance 3 (1): 1-16.
Saif, I., and H. Yaseen. 2005. The efficiency of foreign and domestic banks in MENA region: Evidence on economies of scale and scope. Paper. ERF 12th Annual Conference: Reform - Made to Last, Cairo, Egypt.
Schaeck, K., and M. Cihak. 2008. How does competition affect efficiency and soundness in banking? New empirical evidence. ECB Working Paper No. 932. European Central Bank.
Sealey, C., and J. T. Lindley. 1977. Inputs, outputs, and a theory of production and cost at depository financial institution. Journal of Finance 32: 1251–1266.
Shaffer, S. 1993. A test of competition in Canadian banking. Journal of Money, Credit, and Banking 25 (1): 49–61.
Shaw, E. S. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.
Smirlock, M. 1985. Evidence on the (non) relationship between concentration and profitability in banking. Journal of Money, Credit, and Banking 17 (1): 69-83.
Sufian, F., and M. S. Abd-Majid. 2007. Bank mergers performance and the determinants of Singaporean banks’ efficiency: An application of two-stage banking models. Gadjah Mada International Journal of Business 9 (1): 19–39.
The Star Online. 9 January 2015. Cracks in CIMB, RHB, MBSB merger plan: EPF may not be able to vote. [http://www.thestar.com.my/Business/Business-News/2015/01/09/ Cracks-in-bank-merger-plan/?style=biz]
Weill, L. 2004. On the relationship between competition and efficiency in the EU banking sectors. Kredit und Kapital 37 (3): 329-352.
Wezell, T. 2010. Bank efficiency amid foreign entry: Evidence from the Central American region. IMF Working Paper WP/10/95. International Monetary Fund.
White, H. 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48 (4): 817-838.
Williams, J. 2004. Determining management behavior in European banking. Journal of Banking and Finance 28: 2427-2460.
Wu, J., B. N. Jeon, and A. C. Luca. 2010. Foreign bank penetration, resource allocation and economic growth: Evidence from emerging economies. International Journal of Economic Integration 25 (1): 167-193.
Yildirim, H. S., and G. C. Philippatos. 2006. Restructuring, consolidation and competition in Latin American banking markets. Journal of Banking and Finance 31 (3): 629-639.
Yildirim, H. S., and G. C. Philippatos. 2007. Efficiency of banks: Recent evidence from the transition economies of Europe, 1993-2000. The European Journal of Finance 13 (2): 123-143.
Refbacks
- There are currently no refbacks.
Copyright (c) 2017
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Email the author 
