Effect of mergerson efficiency and productivity: Some evidence for banks in Malaysia

Transcription

1 MPRA Munich Personal RePEc Archive Effec of mergerson efficiency and produciviy: Some evidence for banks in Malaysia Alias Radam and A.H. Baharom and A.M. Dayang-Afizzah Universii Pura Malaysia, Universii Malaysia Sarawak 4. June 28 Online a hp://mpra.ub.uni-muenchen.de/12726/ MPRA Paper No , posed 14. January 29 7:19 UTC

2 EFFECT OF MERGERS ON EFFICIENCY AND PRODUCTIVITY: SOME EVIDENCE FOR BANKS IN MALAYSIA By Alias Radam a, AH Baharom a*, AM. Dayang-Affizzah b, Farhana Ismail b Absrac This sudy is underaken o invesigae he exen o which mergers lead o efficiency by which services are provided o he public and he produciviy of Malaysia s banking insiuions secor. The daa cover he period 1993 o 24, which includes he pre-merger years and he pos-merger years. This sudy aemps o evaluae echnical efficiency, efficiency change, echnical change and produciviy of commercial banks, finance companies and merchan banks using a non-parameric Daa Envelopmen Analysis (DEA) and Malmquis Index approach as he framework for he analyses. I is found ha: (1) ha on average, produciviy across banking insiuions increased a annual rae of 5.8% over he sudy period 1993 o 24; (2) he resuls also indicaed ha almos all of he produciviy growh comes from echnical change (or innovaions in banking echnology) raher han improvemen in efficiency change, which conribues for 6.1% of produciviy growh, while he laer accouned for.2% decline; (3) he merger process led o produciviy improvemens whereby, i is observed ha he produciviy of Malaysia s banking secor has been improved (in erms of efficiency) afer he implemenaion of merger program for domesic banking insiuions in This migh be due o he uilizaion of heir scale economies o improve heir efficiencies. However, he produciviy of banking insiuions has been affeced by cerain economic condiions in year 21 and 24 (such as he Sepember 11 ragedy and he process of capial raionalizaion ha merged eniies have undergone). Keywords: Banking secor, Mergers, DEA and Malmquis index,malaysia Inroducion Merger is a process whereby wo or more companies/insiuion merge ino one company in order o srenghen heir marke posiions. Normally i is marke driven and main economic pushes for his exercise are such as: (1) enhancing efficiency and boosing produciviy and (2) increasing he marke share and in urn, marke power by eliminaing compeiors. However he a Affiliaed wih he Deparmen of Economics, Faculy of Economics and Managemen, Universii Pura Malaysia, Serdang, 434 UPM Selangor. The auhor for correspondence is AH Baharom. Tel: (63) ; baharom@econ.upm.edu.my b Affiliaed wih he Deparmen of Economics, Faculy of Economics and Business, Universii Malaysia Sarawak, Koa Samarahan, 943 1

3 Malaysian scenario is quie differen and unique, whereby i was based on he reques or insrucion of he Cenral Bank or more precisely Bank Negara Malaysia (BNM). Looking from he hierarchy, Malaysian banking sysem consiss of Bank Negara Malaysia (BNM) which funcions as he cenral bank, banking insiuions (commercial banks, merchan banks and finance companies) and oher financial insiuions (discoun houses, foreign banks represenaive offices, and offshore bank in he Inernaional Offshore Financial Cenre in Labuan). As of he end of 1997, he licensed banking sysem consiss of 35 commercial banks, of which 22 are domesic banks and 13 are foreign-conrolled. This conribues o 43.6% of oal financial sysem asses, and whereby he res of he financial sysem asses are made of 39 finance companies (13.6%), 12 merchan banks (4.%), 7 discoun houses (1.9%), and Bank Negara Malaysia (9.8 percen). On he oher hand, non-bank financial inermediaries accouned for 27.1 percen of oal asses of he financial sysem a he end of 1997 (Bank Negara Malaysia, 21).. In 1999, he number of financial insiuion amouned o 58 which comprise, 21 domesic commercial bank, 25 finance companies and 12 merchan banks. These numbers clearly shows ha Malaysia was over-banked, which will lead o inefficien use of resources and, duplicaion of resources and infrasrucure of domesic marke. Thru liberalizaion and globalizaion, Malaysian banking secor has undergone a lo of srucural changes. In addiion, Souh Eas Asian region, including Malaysia was severely affeced by he financial crisis in 1997, which sared wih he descending of Thai Bah in July 1997, causing a sharp impac of recession on Malaysia (BNM, 1999). Due o globalizaion, he banking indusry is expeced o be more dynamic and compeiive in heir operaing environmen. Hence, banking insiuions are encouraged o increase heir compeiiveness in erm of enhancing operaional efficiency and become more innovaive in developing compeiively priced financial producs. The ask of serving he sophisicaed needs of consumers and businesses became a prioriy. Before he financial crisis, hough Malaysian banking secor was sable and performing saisfacorily, finance companies have been over exposed o broad propery and consumpion credi, besides ha, banks have also overexended hemselves o poliically well-conneced corporae eniies backed by volaile asses in he form of shares and real esae. The value of non-performing loans (NPLs) for he financial insiuions also increased remendously, wih he increase for finance companies and merchan banks subsanially compared o commercial banks (Soo, 26.). Responding o he financial crisis, several policy measures were implemened o limi he amoun of credi o he more volaile secors of he economy, in order o reduce he high credi growh and o enhance financial disclosure by financial insiuions. One of he policies ha have been proposed by he governmen o promoe economic recovery was he consolidaion of banking sysem o resolve weaker bank insiuions ha had been badly affeced during he financial crisis (Figure 1). 2

4 Figure 1: Objecives of he Banking Secor Resrucuring Plan Objecives of he Banking Secor Resrucuring Plan Shor Term Long Term - Hal he Vicious Cycle - Simulae Economic Recovery - Encourage Banks o Lend - Creae resilien banking sysem o wihsand fuure shocks - Develop efficien and compeiive banking secor o suppor economic growh and conribue as secor of growh - Provide foundaion o broaden and deepen financial markes and srenghen financial infrasrucure o mee fuure challenges Manage NPLs Danahara CDRC Rehabiliaion Uni Capial Danamod al Funding Special Funds - Finance companies merger programme - BNM o iniiae mergers and use Dana modal o faciliae consolidaion of he banking secor and o raionalise and revamp managemen where necessary - Asse-backed securiisaion - Plan o char he direcion of he banking secor (Source: Bank Negara Malaysia Annual Repor, 1998) 3

5 The merger program for domesic banking insiuions was announced by he Cenral Bank (Bank Negara Malaysia), on 29 July On 14 February 2, Bank Negara Malaysia launched he consolidaion program, whereby 58 insiuions would be merged ino en anchor banking groups, comprising a leas a commercial bank, a finance company and a merchan bank for each anchor bank group. In 24, number of financial insiuion was 26 which comprises of 1 domesic commercial banks, 6 finance companies and 1 merchan banks. The 1 anchor banks which were idenified were Maybank Bhd, Bumipura-Commerce Bank Bhd, RHB Bank Bhd, Public Bank Bhd, Arab-Malaysian Bank Bhd, Hong Leong Bank Bhd, Perwira Affin Bank Bhd, Muli-Purpose Bank Bhd, Souhern Bank Bhd and EON Bank Bhd (Table 1). Table 1: The merging of local banks insiuion Original Banking Group Merged wih Eniy afer merging 1. Affin Bank Bhd Perwira Affin Bank Bhd Affin Finance Bhd Perwira Affin Merchan Bankers Bhd BSN Commercial Bank Bhd BSN Finance Bhd BSN Merchan Bank Bhd. Affin Bank Berhad Affin ACF Finance Berhad Affin Merchan Bank Bhd 2. Alliance Bank Bhd Muli-Purpose Bank Bhd Inernaional Bank Malaysia Bhd Sabah Bank Berhad Bolon Finance Bhd Sabah Finance Bhd Bumipura Merchan Bankers Bhd Amanah Merchan Bank Bhd Alliance Bank Bhd Alliance Finance Bhd Alliance Merchan Bhd 3. Arab Malaysian Bank Bhd Arab-Malaysian Bank Bhd Arab-Malaysian Finance Bhd Arab-Malaysian Merchan Bank Bhd 4. Bumipura-Commerce Bank Bhd Bumipura-Commerce Bank Bhd Bumipura-Commerce Finance Bhd Commerce Inernaional Merchan Bankers Bhd. MBf Finance Bhd Arab-Malaysian Bank Bhd Arab-Malaysian Finance Bhd Arab-Malaysian Merchan Bank Bhd Bumipura-Commerce Bank Bhd Bumipura-Commerce Finance Bhd Commerce Inernaional Merchan Bankers Bhd. 4

6 5.EON Bank Bhd EON Bank Bhd EON Finance Bhd 6. Hong Leong Bank Bhd Hong Leong Bank Bhd Hong Leong Finance Bhd 7. Malayan Banking Bhd Malayan Banking Bhd Mayban Finance Bhd Aseambankers Malaysia Bhd 8. Public Bank Berhad Public Bank Bhd Public Finance Bhd 9. Uama Bank Bhd (now known as RHB Bank Bhd) RHB Bank Bhd RHB Sakura Merchan Bankers Bhd Orienal Bank Bhd, Ciy Finance Bhd Perkasa Finance Bhd Malaysian Inernaional Merchan Bankers Bhd. Wah Ta Bank Bhd Credi Corporaion Malaysia Bhd. PhileoAllied Bank Bhd Pacific Bank Bhd Sime Finance Bhd Kewangan Bersau Bhd. Hock Hua Bank Bhd Advance Finance Bhd Sime Merchan Bankers Bhd. Dela Finance Bhd Inerfinance Bhd EON Bank Bhd EON Finance Bhd Malaysian Inernaional Merchan Bankers Bhd. Hong Leong Bank Bhd Hong Leong Finance Bhd Malayan Banking Bhd Mayban Finance Bhd Aseambankers Malaysia Bhd Public Bank Bhd Public Finance Bhd Public Merchan Bank Bhd RHB Bank Bhd RHB Dela Finance Bhd RHB Sakura Merchan Bankers Bhd 1. Souhern Bank Bhd Souhern Bank Bhd (Source: Bank Negara Malaysia Annual Repor, 21) Ban Hin Lee Bank Bhd Cempaka Finance Bhd Unied Merchan Finance Bhd Perdana Finance Bhd Perdana Merchan Bankers Bhd. Souhern Bank Bhd Souhern Finance Bhd Souhern Invesmen Bank Bhd The objecive of he presen paper is o invesigae he produciviy of Malaysia s banking secor hroughou he pre-merger years and pos-merger years ( ). In order o achieve our purpose, he sudy is organized as follows: The lieraure review is conduced in secion 2. Secion 3 will presen he mehodology and he daa used in he analysis. This is followed by a discussion on he empirical resuls of his sudy and he las secion conains our conclusion. 5

7 Lieraure Review There are numerous sudies on banking efficiency and produciviy using he nonparameric Daa Envelopmen Analysis (DEA) as he framework for heir analyses such as Kadir e al. (22), Alias e al. (22), Barr e al. (1999), Grigorian and Manole (22), Grigorian and Manole (22) Alias e al. (22) analyzed he efficiency and produciviy of Indonesian commercial banks from year 1991 o 1999 using Daa Envelopmen Analysis (DEA) and he Malmquis produciviy index. They explained ha, alhough here was a decline in produciviy in 1997, due largely o he financial crisis, he echnical efficiency and produciviy sill grew a he fronier over he period. They also saed ha he level of efficiency and produciviy of he bank is no really refleced by he srucure of he commercial banks (in erms of asses sizes and oal loans). Regarding o echnical efficiency resuls, respecive banks need o manage heir inpus and avoid wasage as he bank asses is idenified as he main source of inefficiencies. Khong and Habibullah (22) sudied he effecs of bank mergers on produciviy in 199s using he mulilaeral produciviy index and found ha, for he period 1989 o 1999, he local banks was less producive compared o he foreign commercial banks. Acquiring banks have higher produciviy level han argeed banks, due o he bank mergers. In oher words, produciviy as a whole should be improved as mergers have been seen as acquisiion of less producive banks by more producive banks. Since 1989, banks have less incenive o operae efficienly due o governmen inervenions. However, he Bank Negara Malaysia idea o srenghen he local financial insiuions hrough consolidaion is mos welcomed. The seps are crucial since he new merger eniy needs ime o obain he benefi from bank mergers. Tan and Hooy (22) examined he main aspecs of he Malaysian bank merger program, and sudied he effecs of he consolidaion on he volailiy of Malaysian bank sock reurns by using General Auoregressive Condiional Heeroskedasiciy (GARCH) model. They found ha he bank s sock prices and reurns become more sable (afer he iniial consolidaion announcemen), based on he esimaion of condiional variances. Before he announcemen, here was a persisen posiive risk reurns radeoff and asymmerical news effecs in he bank sock. However, bank socks faced a huge reducion in he volailiies and he asymmerical news effecs, afer he announcemen. Brewer e al. (199) saed ha he srucure of he U.S banking indusry was changed dramaically by he bank consolidaion in he 199s due o he mergers whereby he oal number of banks has been reduced significanly. Mergers also led o he increased marke share of large banks. They also found ha he difference merger moivaions affecs merger bid premiums ha he acquiring banks are willing o offer for he arges. They also suggesed ha he argeed banks more likely o offer a larger bid premium; by argeing higher profis hrough higher reurns on asses and/or reurns on equiy. Besides, bid premiums and he announcemen-period abnormal sock reurns can be posiively correlaed wih he long-erm performance of he merged banks, if he marke paricipans able o idenify in advance he improved performance associaed wih bank acquisiions. 6

8 Pillof and Sanomero (1996) saed ha consolidaion can reduce cos if economies of scale are achieved. If redundan faciliies and saffs are eliminaed during he pos-merger organizaion, he larger insiuions may become more efficien. In addiion, cos can be reduced if bank offer several producs a a lower price compare o when separae bank offer individual producs. They also agreed ha here is no significan gain in value or performance from he consolidaion. Besides, as here is no correlaion beween changes in accouning-based performance measures and sock marke reurns around he merger announcemen, hus he marke is unable o accuraely forecas he success of individual mergers. Moreover, he consolidaion in he Unied Saes indicaes nohing o prove ha bank merger have impacs owards improvemen in he performance. They also sugges ha misguided view of one s own managerial alen has lead o he resrucuring of he world financial srucure. People do no really undersand wha acually happened in a consolidaion process. However, a specific and hrough assessmen on managemen process in he agreemen abou a consolidaion can avoid his problem. Kadir e al. (22), examined he oal facor produciviy (TFP) and echnical efficiency of 32 finance companies in Malaysia from year 1988 o 1996 by using similar framework. They however concluded ha he major source of overall economic growh and welfare improvemens is produciviy growh. I is hereby necessary o undersand and examine he level of produciviy of each decision-making uni. Their research also shows ha average oupu of he finance companies grew a 2.77% per annum. They also found ha he produciviy of all finance company decreased by 1.3% per annum. Thus, o increase heir echnical efficiency, finance companies need o save and reallocae heir exising resources. Barr e al. (1999) evaluaed he producive efficiency and performance of U.S. commercial banks over he period 1984 o 1998 using a consrained muliplier, inpu-oriened Daa Envelopmen Analysis (DEA) model. They found ha he relaionships beween efficiency of inpus and oupus are srong and consisen, as well as independen measures of bank performance. They also discovered ha he impac of varying economic condiions is mediaed o some exen by he relaive efficiencies of he banks ha operae in hese condiions. In recen years, changes in he regulaory environmen, huge growh in off-balance shee risk managemen financial insrumens, he inroducion of e-commerce and on-line banking, and significan financial indusry consolidaion have made he U.S. banking indusry highly compeiive. The bank examiner raings deermine ha here is a close relaionship beween efficiency and soundness. Grigorian and Manole (22) applied Daa Envelopmen Analysis (DEA) o bank level-daa from a wide range of ransiion counries o measure he commercial banks efficiency (by sressing profi maximizaion and provision of ransacion services as banks' primary objecives). DEA resuls imply ha banking secors wih few large and, well capialized banks have more chance o generae beer efficiency and higher raes of inermediaion. They argued ha i is necessary o model various ypes of funcions performed by banks, and conrol for he inpus necessary o provide a cerain level of uiliy o owners (profis) and deposiors (services) 7

9 in order o fully assess he efficiency of commercial bank operaions. They also implied ha privaizaion of banks does no guaranee significan improvemens in efficiency. Mehodology and Daa Daa Envelopmen Analysis (DEA) is a linear-programming mehodology, which uses daa on he inpu and oupu quaniies of a group of counries o consruc a piece-wise linear surface over he daa poins. This fronier surface is consruced by he soluion of a sequence of linear programming problems one for each firm/company in he sample. The degree of echnical inefficiency of each firm/company (he disance beween he observed daa poin and he fronier) is produced as a byproduc of he fronier consrucion mehod. Daa envelopmen analysis (DEA), or known as fronier analysis, was firs developed by Charnes e al. (1978), and exended by Banker e al. (1984) o include variable reurns o scale. I is a performance measuremen echnique which can be used for evaluaing he relaive efficiency of decision-making unis (DMU's) in organizaions. DMU is a disinc uni wihin an organizaion ha has flexibiliy wih respec o some of he decisions i makes, bu no necessarily complees freedom wih respec o hese decisions. In his sudy, DMU is represened by banking secor iself, which are commercial banks, merchan banks and finance companies. Today, he DEA measure has been used o evaluae and compare educaional deparmens (schools, colleges and universiies), healh care (hospials, clinics) prisons, agriculural producion, banking, armed forces, spors, marke research, ransporaion (highway mainenance), cours, benchmarking, index number consrucion and many oher applicaions. Thus, Daa Envelopmen Analysis (DEA) and (inpu-or-oupu based) Malmquis Index mehods are used as he produciviy measuremens in his sudy. In his sudy, produciviy change in each of he banking secors is calculaed as he geomeric mean of wo Malmquis indexes. Inroduced by Caves e al. (1982), he (oupu-based) Malmquis produciviy index is defined as he raio of wo (oupu) disance funcions. Disance funcions are funcional represenaions of muliple-oupu, muliple-inpu echnology which requires daa only on inpu and oupu quaniies. This index, herefore, is a primal measure of produciviy change ha, in conras o he Tornqvis or Fisher Index, does no require cos or revenue share for aggregaion purposes and ye is capable of measuring oal facor produciviy growh in a muli-inpu, muli-oupu seing. This paper follows he approach developed and implemened by, among ohers, Fare e al. (1985), Fare e al. (1994), and Fare and Grosskopf (1996) which explicily recognizes ha improvemens in echnical efficiency and echnical progress are wo imporan facors in produciviy growh. The measuremen of produciviy change by he Malmquis index, as is done in his sudy, is based on he concep of oupu disance funcion. 8

10 The inpu-oriened Malmquis index is generally compued as geomeric mean of adjacen year's index value (Fare e al., 1994 and Price and Weyman-Jone, 1999) as D (x,y D (x,y M (x,y,x,y ) (1) 1 D (x,y ) D (x,y ) The index hus employs disance funcions from wo differen periods or echnologies, D (..,..) and D 1 (..,..), and wo pairs of inpu-oupu vecors, (x,y ) and 1 1 (x,y ). Caves e al ) assume ha Do (x,y ) = Do (x,y ) implying a own-period observaions are echnically efficien in he sense of Farrell (1957). The approach used in his paper does no impose such resricion a priori and explicily allows for echnical inefficiency. As has been demonsraed by Fare e al. (1989), he Malmquis index (1) can be decomposed ino wo componens, namely echnical efficiency change (EFFCH) and echnical change (TECHCH), defined as: 1 D D (x,y D (x,y D (x,y M (x,y,x,y ) X (2) 1 1 (x,y ) D (x,y ) D (x,y ) Whereby he raio ouside he square bracke measures he change in relaive efficiency (i.e., he change in how far observed producion is from maximum poenial producion) beween year and + 1. The geomeric mean of he wo raios inside he square bracke capures he shif in echnology beween he wo periods evaluaed a x, and x +1 ha is Efficiency Change = EFFCH = D 1 (x, y D (x, y ) 1 1 ) (3) Technical Change = TECHCH = D 1 D (x (x 1 1,y,y 1 1 ) D 1 D (x,y (x,y ) 1 2 (4) 9

11 Alhough, in principle, one may calculae Malmquis produciviy index under differen reurns o scale assumpions, his sudy calculaes he index relaive o a consan reurns o scale (CRS) echnology which is decomposed ino efficiency change and echnical progress. Since under CRS, scale of operaion is irrelevan, enire efficiency change is due o echnical efficiency change. However, if variable reurns o scale (VRS) is allowed (i.e., echnology ha exhibis firs increasing, hen consan, and finally decreasing reurns) efficiency change could come from he use of inefficien scale of operaion (idenified as Scale Efficiency) as well as from pure echnical inefficiency. An enhanced decomposiion of he Malmquis index, as developed in Fare e al. (1994), ha recognizes his issue is implemened in his sudy. In his decomposiion, he efficiency-change componen calculaed relaive o CRS echnology is decomposed ino a pure efficiency change (PECH) and a scale efficiency change (SECH) ha reflecs he use of subopimal scale of operaion by firms. We can include scale efficiency for period s and + 1 in he measure of efficiency change as follows: EFFCH 1 So (x,y ) Do (x,y VRS) (5) S (x,y ) D (x,y ) VRS) o o 1 1 Whereby; Scale Effeciency Change = SECH = So (x,y ) (6) S (x,y ) o and Pure Effeciency Change = PECH = 1 Do (x,y VRS) (7) D (x,y ) VRS) o 1 1 So, he enhance decomposiion of Malmquis Produciviy Index (M o ) implemened in his sudy can be wrien as: 1

12 Malmquis Produciviy Index = EFFCH x TECHCH = SECH x PECH x TECHCH (8) In his sudy, secondary daa from year 199 o 25 will be used o measure he produciviy of banking secor for pre-merger years and pos-merger years using he Daa envelopmen analysis (DEA)-like linear programs and a (inpu-oupu oriened) Malmquis TFP index are used o measure produciviy change. In his sudy, he daa se consis of a se of ime series daa for inflow of financial insiuion repor cover he period 1993 o 24. We adop he Malmquis Index measures using hree variables as oupu (ne ineres income, Non-ineres income and Toal loans) and five inpus, namely operaing cos, ineres expenses, number of insiuions, office nework and number of employees (which includes commercial bank, merchan bank and finance company). Daa for he analysis were exraced from boh prined and elecronic resources. Daa for his sudy were also obained from BNM websie and Bank Negara Malaysia annual repor published by Bank Negara from year In addiion, some daa, aricle and online journal ha are relaed o he sudy were exraced from inerne. This BNM ime series daa explain he implicaion of merger o banking secor produciviy. Resuls and Discussion Using he daa envelopmen analysis compuer program wrien by Coelli (1996), he inpu oriened Malmquis Toal Facor Produciviy (TFP) change index has been calculaed. A value of he index greaer han one will indicae a posiive growh of oal produciviy and a value less han one indicaes decline in produciviy from period o period +1. Table 2 show an average annual rae of produciviy and efficiency change in Malaysia banking insiuion, From he las column, i can be clearly observed ha on average, produciviy across banking insiuions (consiss of commercial banks, finance companies and merchan banks) increased a annual rae of 5.8% over he sudy period 1993 o 24. We can also observe ha, overall financial insiuions efficiency change is.2 % lower. On he oher hand, average echnology/echnical efficiency change index (TECHCH) increased abou 6.1% over he same ime period. The scale efficiency resuls conclude ha he financial insiuions are efficien (SECH value equal o uniy). From he resuls i can also be concluded ha all he banks under he sudy are efficien, excep for he merchan banks. Thus, in general, i shows ha he financial secors in Malaysia are generally efficien. However, in erm of oal facor produciviy (TFP), boh finance companies and merchan banks indicae ha he TFP growh of 2.1% and 37.9% respecively. While TFP for commercial banks is -15.9% (TFPCH=.841). 11

13 Table 2:. Average Annual Rae of Produciviy and Efficiency Change in Malaysia Banking Insiuion, Efficiency Change (EFFCH) Technical Efficiency Change (TECHCH) Pure Efficiency Change (PECH) Scale Efficiency Change (SECH) TFP Change (TFPCH) Commercial Banks Finance Companies Merchan Banks Mean The mean efficiency changes (EFFCH) for he financial insiuions shows ha hey are efficien (index value equal or above uniy) for all he years excep for 1997, 1998, 21 and 24 (Table 3). The efficiency change (EFFCH) values for hose years are.993,.996,.993 and.974 respecively. This could be due o economic condiions in hose years. For example, in 1997, Malaysia experienced financial crisis, while in 21, he banks are reposiioning heir operaions and aciviy afer he merger process. Besides ha, we can also observe ha he produciviy of he financial insiuions seem o improve in 22 (especially afer merger in 21), hough afer ha i deerioraes again due o anoher move by he cenral bank(bnm) o furher consolidaes he local banks. In addiion, he value of pure efficiency change (PECH) are equal or above uniy over he sudy periods excep for 1998 and 24 (where he value are.997 and.974 respecively). Table 3: Summary of Annual Means of Malmquis Index for Malaysian Banking Insiuion, Year Efficiency Change (EFFCH) Technical Efficiency Change (TECHCH) Pure Efficiency Change (PECH) Scale Efficiency Change (SECH) TFP Change (TFPCH) Mean

14 The similar rend can also be observed wih he scale efficiency (SECH) and echnical efficiency change (TECHCH). The scale efficiency change value are efficien (score uniy value) excep for 1997, 1998 and 21. While he average echnical efficiency change are posiive hroughou he years excep for 1997, 21 and 24 (TECHCH index for year 1997 = -33.1%, 21 = -45.8% and 24 = -25.9%). Lasly, he average produciviy growh for he financial insiuions is 5.8% per annum.1999 recorded he highes oal facor produciviy (TFP) growh of 71.9%. This migh be due o 1999 being he year of recovery and consolidaion for he banking sysem. A he same ime, furher indusry consolidaion hrough he merger process ook place, resolving some of he problems associaed wih smaller and weaker banking insiuions which became apparen during he financial crisis. On he conras, 21 shows deerioraion in erm of produciviy growh which is -46.1%. The Sepember 11 h ragedy had brough in negaive impac o world s (including Malaysia s) economic growh. Indirecly, his migh also led o he decline in Malaysia s banking secor produciviy. Table 4 shows ha, for he period 1993 o 1996, he efficiency change index (EFFCH) for commercial banks equal o uniy. I declined 2.1% in 1997 (EFFCH=.979). Meanwhile, he efficiency change index for 1998 and 1999 is 1.21 and.99, respecively. On he oher hand, efficiency change index has improved 1.% in 2 and mainained he value of uniy over he years from 21 o 24. This condiion may be due o he efficien banks managemen. Meanwhile, he echnical change index (TECHCH) is above uniy from 1993 o 1996, means ha he echnical change of he commercial banks are efficien. However, commercial banks experienced negaive echnical change over he period 1997 o 21, excep in 1999, where i had experienced posiive echnical change (TECHCH=1.417). In 22 and 23, he echnical change had increased. However, he echnical change index once again shows deerioraion in 24 (TECHCH=.647). Table 4: Summary of Annual Means of Malmquis Index for Malaysian Commercial Banks, EFFCH TECHCH PECH SECH TFPCH

15 On he aspec of pure efficiency change (PECH), commercial banks score PECH index equal o one (which indicaes efficiency) over he sudy period of 1993 o 24. Furhermore, for he period of 1993 o 24, commercial banks score posiive scale efficiency change value (SECH index equal or above uniy). Excep for year 1997 and 1999, where he index decreased slighly (-2.1% and -1.% respecively). The oal facor produciviy change (TFPCH) index for year 1993, 1994, 95 and 96 are 1.292, 1.222, 1.71 and 1.12 respecively. The resuls indicae ha he banks experienced posiive produciviy growh from year 1993 o However, in year 1997 o 21 (excludes year 1999) he banks experienced negaive produciviy growh (TFPCH below uniy). The oal facor produciviy change (TFPCH) for year 1997, 1998, 2 and 21 are.23,.95,.883 and.311 respecively. In year 1999, he produciviy had increased 4.3% (migh be due o governmen policies ha was implemened o promoe economic recovery). In addiion, in 22 and 23, commercial banks had also showed posiive produciviy growh (efficien). In 24, he oal facor produciviy (TFP) has declined (TFPCH=.647). The declinaion in echnical change and oal facor produciviy change in year 24 was due o he compleion of merger exercise beween commercial banks and finance companies in he hird quarer of 24. In ha year, five ou of en finance companies, accouning 55% of he oal finance companies asses, successfully merged wih heir respecive commercial bank. The new Bafin (Banking and financial) eniies are Alliance Bank Berhad, EON Bank Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad and Public Bank Berhad. The merged eniies have undergone he process of capial raionalizaion, saff redeploymen and reorganizaion, branch relocaion and delivery channel consolidaion o gain economies of scale and scope posmerger. The finance companies experienced posiive efficiency change (EFFCH equal o uniy) from 1993 o 1997 (Table 5). However, he efficiency change index has decreased 3.3% (EFFCH=.967) in Then, he value rose 3.4% in 1999 (EFFCH=1.34). Meanwhile, he finance companies score efficiency change index equal o uniy in 2. In year, 21 and 22, he efficiency change index is.979 and 1.22 respecively (indicaes improvemen in he efficiency for year 22). The finance companies mainained he value of uniy in 23 and

16 Table 5: Summary of Annual Means of Malmquis Index for Malaysian Finance Companies, EFFCH TECHCH PECH SECH TFPCH Meanwhile, he echnical change index (TECHCH) is above uniy from 1993 o 1997, excep for 1998 whereby i declined 9.9% (TECHCH=.91). For 1999 and 2, he echnical change index rose o and 1.31 respecively. In 21, he finance companies experienced he lowes echnical change value (TECHCH=.39). I is believed ha he economic condiion was affeced by he Sepember 11 h ragedy, hus no allowing finance companies o inves more in echnological innovaion. For he consequen years 22, 23 and 24 he observed value are 1.249, and.681 respecively. In pure efficiency change (PECH), finance companies score posiive pure efficiency change (PECH index equal or above uniy), excep for In 1998, he pure efficiency change index declined.1% (PECH=.991). Furhermore, finance companies experienced highes scale efficiency change value (SECH) in 1999, which was These condiions arise from he merger and oher resrucuring exercises underaken in he indusry, as well as he absorpion of eigh finance companies by he paren commercial banks. The second highes scale efficiency change value is in year 22, where he value is This may be due o recovery of he global economy (afer Sepember 11 h ragedy). On he oher hand, he finance companies scored he lowes scale efficiency change value in 21, which was.979. While in 1993 o 1997, 2, 23 and 24, he finance companies score efficiency value (equal o uniy). We can also observe ha he oal facor produciviy change (TFPCH) index for hese finance companies are efficien (TFP equal or above uniy), excep for 1998, 21 and 24. The oal facor produciviy change (TFPCH) for 1998, 21 and 24 are.871,.33 and.681 respecively. Finance companies achieved he highes level of produciviy growh in year 1999 (TFPCH=1.9) and he lowes produciviy growh rae in year 21 (TFPCH=.33). The merger ha sared in year 1999 has led o improvemen in produciviy growh. However, he world s poliic conflics (Sepember 11 ragedy) had brough negaive impac o banking secor s produciviy. 15

17 Table 6 presens he summary of annual means of Malmquis Index for Malaysian merchan banks, I shows ha, Merchan banks experienced sagnaion in efficiency change (EFFCH value equal o uniy) over he period of 1 years (1993 o 23). Only in 24 he efficiency change decline slighly abou 7.5% (EFFCHC=.925). Meanwhile, he echnical change index (TECHCH) is above uniy from 1993 o 23, excep in 24 whereby i declined 7.7% (TECHCH=.923). Merchan banks experienced he highes echnical change value in 2 (TECHCH=2.557) and he lowes was in 24 (TECHCH=.923). As for pure efficiency change (PECH) index, merchan banks score posiive efficiency index (PECH index equal or above uniy), excep for 24 whereby i declined 7.5% (PECH=.925). In erm of scale efficiency change value (SECH), merchan banks score efficiency value equal o uniy hroughou he sudy periods of 1993 o 24, means ha he merchan banks is efficien. We can also observe ha he oal facor produciviy change (TFPCH) index for merchan banks are posiive (TFPCH equal or above uniy) hroughou he sudy period, excep in 24 whereby he oal facor produciviy change (TFPCH) is.853. Merchan banks achieved he highes level of produciviy growh in year 2 (TFPCH=2.557) and he lowes produciviy growh rae in year 24 (TFPCH=.853). Table 6: Summary of Annual Means of Malmquis Index for Malaysian Merchan Banks, EFFCH TECHCH PECH SECH TFPCH

18 Conclusion This sudy measures he oal facor produciviy (TFP) and is efficiency componen of banking insiuions (commercial banks, merchan banks and finance companies) in Malaysia from year 1993 o 24 by using a non-parameric Daa Envelopmen Analysis (DEA) and (inpu-or-oupu based) Malmquis Index. I is necessary o undersand and measure he level of produciviy of each decision-making uni, due o he fac ha produciviy growh is he main source of overall economic growh. The resul of his sudy clearly shows ha on average, produciviy across banking insiuions (consiss of commercial banks, finance companies and merchan banks) increased a annual rae of 5.8% over he sudy period 1993 o 24. In addiion, i is found ha almos all of he produciviy growh comes from echnical change (TECHCH) raher han improvemen in efficiency change (EFFCH), which conribuing for 6.1% of produciviy growh, while he laer accouned for.2% decline. This finding is concurren wih he finding of Khong and Habibullah, (26), Alias e al. (22), Kadir e al. (22) Due o he financial crisis in 1997, governmen promoes economic recovery hrough he consolidaion of banking sysem o resolve weaker bank insiuions ha had been badly affeced. I has been noed ha he produciviy of Malaysia s banking secor (commercial banks, merchan banks and finance companies) had improved (efficien) afer he implemenaion of merger program for domesic banking insiuions in However, i should be realized ha he produciviy of banking insiuions had also been affeced by cerain economic condiions in 21 and 24. The Sepember 11 h ragedy in 21 had brough negaive impac o global (including Malaysia s) economic growh and developmen. Meanwhile, he process ha merged eniies (commercial banks and finance companies) have undergone, such as he process of capial raionalizaion, saff reorganizaion and branch relocaion in he hird quarer of 24 also affec heir produciviy growh.thus, he resul of his sudy suppors he Governmen approach for he consolidaion of banking sysem o resolve weaker bank insiuions ha had been badly affeced during he financial crisis. 17

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