Modeling bank efficiency in Malaysia: An adaptive network data envelopment analysis approach / Md. Abul Kalam Azad

Md. Abul Kalam , Azad (2018) Modeling bank efficiency in Malaysia: An adaptive network data envelopment analysis approach / Md. Abul Kalam Azad. PhD thesis, University of Malaya.

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Abstract

This study proposes an adaptive Network Data Envelopment Analysis (NDEA) technique, which examines efficiency of all 43 commercial banks operating in Malaysia by utilizing the three traditional bank efficiency measurement approaches (intermediation, production and profitability). From past studies, separate bank efficiency measurement approaches have proven to produce biased results. For instance, when bank efficiency is measured solely based on its profitability, banks’ long-term sustainability (capital ratio) could be ignored and affect the bank’s profitable status. This study also proposes CAMELS (Capital adequacy, Assets, Management-capability, Earnings, Liquidity, Sensitivity) rating in selecting the variables to measure bank efficiency by explaining how the variables are linked to each other. This has not been done in any previous studies. The contributions of this study are three-fold. This study explains how the traditional ‘black-box’ of input-output has failed to probe into the bank’s true efficiency. Secondly, by using the proposed model, the study empirically contributes in providing a better comparative efficiency measurement platform in Malaysian context. Thirdly, this study addresses the existence of undesirable bank output (i.e., bad debts) in determining bank efficiency. Findings of this study suggest that efficiency scores vary with respect to variable and approach selection. When considering the effect of business cycles, profitability approach is recommended. Whereas, intermediation approach should be more suitable in examining the bank performance with large time series data because it lies on the “going concern” accounting concept. This measure of bank performance refers to the ability of a bank to convert deposits into loans. Lastly, the production approach would give a holistic idea on the banks’ ability to serve the economy. In order to measure bank efficiency more accurately, it is also important to consider the undesirable outputs generated from banking operations. Past research stated that benchmarking of banks based only on net income could lead to bankruptcy even if that bank had high efficiency score. Lastly, the empirical findings of this study reveal that foreign Islamic banks are pioneer in all three nodes in the proposed NDEA model. These results signify an advanced capacity of foreign banks in risk mitigation, investment portfolio and liquidity management. In the context of Malaysian’s current bank regulations, with existing discriminations and government restrictions on foreign bank ownership, these results reveal that even in a favorable business condition, the Malaysian local conventional banks have not been performing well.

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