The efficiency of Islamic banks in Malaysia: Based on DEA and Malmquist productivity index
DOI:
https://doi.org/10.24191/jeeir.v6i3.02Keywords:
Performance, Islamic bank, Data envelopment analysis, DEA, MalmquistAbstract
This paper aims to investigate the impact of liberalisation move by Bank Negara Malaysia (BNM) towards the efficiency of domestic and foreign Islamic banks (IBs) in Malaysia. This is consequence of decision of BNM that awarded licenses to three international IBs, namely Kuwait Finance House (KFH), Al Rajhi Bank, and Asian Finance Bank in 2005. In addition, this study takes into consideration the existing foreign banks in the country that operate via Islamic banking subsidiaries as part of foreign IBs. The research evaluates the impact of foreign Islamic banks in Malaysia by measuring their contribution to the growth of the Malaysian Islamic banking industry. Using a sample of 16 IBs in Malaysia from 2008 to 2015, the study uses Data Envelopment Analysis (DEA) in measuring the efficiency level of each bank and comparative between the performance of domestic and foreign IBs in the country. The paper also employs the Malmquist Productivity Index to gauge the changes in its components between the same subjects and timeframe. The DEA results showed that the domestic Islamic banks are considered more efficient than most domestic Islamic banks outperforming the foreign Islamic banks. Banks like Hong Leong Islamic, Maybank Islamic, Public Islamic, and RHB Islamic are considered among the top performers for technical efficiency and scale efficiency. The study also found that based on the Malmquist Productivity Index, the least efficient banks based on DEA have improved in technical efficiency, technology, and total factor productivity (TFP).
References
Anouze, A. L. (2015). Efficiency of performance of banks in the Gulf region before, during and after crises (financial and political). Islamic banking and finance – Essays on corporate finance, efficiency and product development, 3, 111-124.
Avkiran, N. K. (1999). An application reference for Data Envelopment Analysis in branch banking: Helping the novice researcher. International Journal of Bank Marketing, 17(5), 206-220.
Bader, M. K. I., Mohamad, S., Ariff, M., and Hassan, T. (2008). Cost, revenue and profit efficiency of Islamic versus conventional banks: International evidence using Data Envelopment Analysis. Islamic Economic Studies, 15(2), 23-76.
Banker, R. D., Charnes, A., and Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in Data Envelopment Analysis. Management Science, 30(9), 1078-1092.
Basri, M. F. (2016). The performance of Malaysian Islamic banking industry and the impact of foreign Islamic banks. (Doctoral dissertation), Durham University, United Kingdom.
Berger, A. N., and Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98(2), 175-212.
Boussofiane, A., Dyson, R. G., and Thanassoulis, E. (1991). Applied Data Envelopment Analysis. European Journal of Operational Research, 52(1), 1-15.
Charnes, A. (1994). Data Envelopment Analysis: Theory, methodology and applications. Massachusetts: Kluwer Academic Publishers.
Coelli, T. J. (1996). A guide to DEAP Version 2.1: A Data Envelopment Analysis (computer) program. New South Wales: University of New England, Centre for Efficiency and Productivity Analysis, Working Paper, 96(08).
Coelli, T. J., Rao, D. P., O’Donnell, C. J., and Battese, G. E. (2005). An introduction to efficiency and productivity analysis (2nd ed.). New York: Springer Science + Business Media Inc.
Cooper, W. W., Seiford, L. M., and Tone, K. (2007). Data Envelopment Analysis: A comprehensive text with models, applications, references and DEA-solver software: Second edition. New York: Springer.
Deliktas, E. (2002). An analysis of efficiency and total factor productivity growth of the private manufacturing industry in Turkey. METU Studies in Development, 29(3/4), 247-284.
Denizer, C. A., Dinc, M., and Tarimcilar, M. (2000). Measuring banking efficiency in the pre- and post-liberalization environment: Evidence from the Turkish banking system. World Bank Policy Research Working Paper No. 2476 1-58.
Dyson, R. G., Allen, R., Camanho, A. S., Podinovski, V. V., Sarrico, C. S., and Shale, E. A. (2001). Pitfalls and protocols in DEA. European Journal of Operational Research, 132(2), 245-259.
Emrouznejad, A., and Anouze, A. L. (2010). Data envelopment analysis with classification and regression tree–a case of banking efficiency. Expert Systems, 27(4), 231-246.
Emrouznejad, A., and Yang, G.-l. (2017). A survey and analysis of the first 40 years of scholarly literature in DEA: 1978–2016. Socio-Economic Planning Sciences.
Golany, B., and Roll, Y. (1989). An application procedure for DEA. Omega, 17(3), 237-250.
Johnes, J., Izzeldin, M., and Pappas, V. (2014). A comparison of performance of Islamic and conventional banks 2004–2009. Journal of Economic Behavior & Organization, 103, Supplement(0), S93-S107.
Kamaruddin, B. H., Safa, M. S., and Mohd, R. (2008). Assessing production efficiency of Islamic banks and conventional bank Islamic windows in Malaysia. International Journal of Business Management Research, 1(1), 31-48.
Keskin, B. Y., and Degirmen, S. (2013). The application of Data Envelopment Analysis based Malmquist total factor productivity index: Empirical evidence in Turkish banking sector. Panoeconomicus, 60(2), 139-159.
Kumbhakar, S. C., and Lovell, C. A. K. (2003). Stochastic frontier analysis. Cambridge: Cambridge University Press.
Liao, C.-S. (2009). Efficiency and productivity change in the banking industry in Taiwan: domestic versus foreign banks. Banks and Bank Systems, 4(4), 84.
Matthews, K., and Ismail, M. (2006). Efficiency and productivity growth of domestic and foreign commercial banks in Malaysia Cardiff Economics Working Papers. Cardiff, UK.
Mokhtar, H. S. A., Abdullah, N., and Alhabshi, S. M. (2008). Efficiency and competition of Islamic banking in Malaysia. Humanomics, 24(1), 28-48.
Mostafa, M. (2007). Modelling the efficient of GCC banks: A Data Envelopment Analysis approach. International Journal of Productivity and Performance Management, 56(7), 623-643.
Mustafa, S., and Mehmood, B. (2015). Efficiency Change in Pakistan Commercial Banking Sector: A Pre and Post Digital-Restructuring Analysis. Journal of Emerging Economies and Islamic Research, 3(1).
Ong, T. S., Lim, Y. T., and Teh, B. H. (2011). A comparison on efficiency of domestic and foreign banks in Malaysia: A DEA approach. Business Management Dynamics, 1(4), 33-49.
Parinduri, R. A., and Riyanto, Y. E. (2014). Bank ownership and efficiency in the aftermath of financial crises: Evidence from Indonesia. Review of Development Economics, 18(1), 93-106.
Pasiouras, F. (2008). Estimating the technical and scale efficiency of Greek commercial banks: The impact of credit risk, off-balance sheet activities, and international operations. Research in International Business and Finance, 22(3), 301-318.
Pawlowska, M. (2005). Competition, concentration, efficiency, and their relationship in the Polish banking sector No. 32: National Bank of Poland, Economic Institute.
Ramesh, M., Reddy, C. S. R., and Kasaiah, C. (2006). Technical change and total factor productivity growth in Indian manufacturing sector: A Malmquist Index approach.
Ray, S. C. (2004). Data Envelopment Analysis: Theory and techniques for economics and operations research. Cambridge: Cambridge University Press.
Srairi, S., Kouki, I., and Harrathi, N. (2015). The relationship between Islamic bank efficiency and stock market performance: Evidence from GCC countries. Islamic banking and finance – Essays on corporate finance, efficiency and product development, 3, 125-135.
Sufian, F. (2007). Malmquist indices of productivity change in Malaysian Islamic banking industry: Foreign versus domestic banks. Journal of Economic Cooperation, 28(1), 115-150.
Wezel, T. (2010). Bank efficiency amid foreign entry: Evidence from the Central American Region: International Monetary Fund.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2018 Mohd Faizal Basri, Amirul Afif Muhamat, Mohamad Nizam Jaafar
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
