Relative Efficiency of Malaysian Commercial Banks: A Non-Parametric Approach

This paper investigates the relative efficiency of Malaysian commercial banks for the years of 2005 to 2009. Data Envelopment Analysis is the method used to evaluate efficiency of 20 commercial banks in Malaysia including 9 domestic banks and 11 foreign banks. Based on the definition of input-output, most of the studies related to bank efficiency adopt either production or intermediation approach. However, in this study both approaches have been employed to find how efficiency score change when inputs-outputs are changed. Findings of this paper suggest that in general commercial banks are more efficient via production approach than intermediation approach. This study also compares the efficiency scores between domestic and foreign banks to find differences or similarities of bank performance under different ownership. Evidence is not in favor of domestic banks via production method while it is in favor of domestic banks under intermediation approach. In other words, the empirical results imply that foreign banks in production approach and domestic banks in intermediation approach were more efficient than their counterparts. In the last section, this study examines the efficiency among large, medium and small banks which were categorized by total assets to find the influence of size in commercial banks' performance in Malaysia. Results suggest that size has no significant impact on banks' performance in Malaysia. Although the influence is not substantial, however, the empirical results show that small banks are somewhat more efficient under production method while they are least efficient banks under intermediation approach comparing with large and medium banks.