Revenue shifts and non‐bank financial institutions' productivity

Purpose - The purpose of the present paper is to examine the impact of off‐balance sheet (OBS) activities on non‐bank financial institutions' (NBFI) productivity. Design/methodology/approach - The paper utilized the Malmquist Productivity Index (MPI) methodology, which allows us to examine five different indices namely, the productivity change (TFPCH), technological change (TECHCH), efficiency change (EFFCH), pure technical efficiency change (PEFFCH), and scale efficiency change (SECH) indices. A series of parametric and non‐parametric tests are performed to examine whether the merchant banks and finance companies were drawn from the same population. Finally, a multivariate analysis based on the GLS fixed and random effects estimators are employed to examine the relationship between the productivity scores derived from the MPI with NBFI specific characteristic variables. Findings - The empirical findings suggest that Malaysian NBFIs have exhibited productivity progress during the study period. The decomposition of the TFPCH index into its EFFCH and TECHCH components indicates that the Malaysian NBFIs productivity progress was mainly attributed to technological progress rather than efficiency increase. We have also examined the productivity progress/regress of different NBFI groups operating in Malaysia. The results suggest that while the merchant banks have exhibited productivity progress attributed to the increase in efficiency, the finance companies on the other hand have exhibited productivity decline due to the decline in efficiency. The inclusion of OBS items has resulted in a lower Malaysian NBFIs productivity growth. However, the findings suggest that while the merchant banks' productivity was enhanced with the inclusion of OBS items, the finance companies' productivity growth seem to have worsened. The results suggest that the omission of OBS items may result in the TECHCH of both the merchant banks and finance companies to be overestimated. Conversely, the inclusion of OBS items has had positive impact on both the merchant banks' and finance companies' efficiency. The empirical findings also suggest that the omission of OBS items resulted in the overestimation of both the merchant banks and finance companies scale inefficiency. Research limitations/implications - The paper can be extended to consider the production approach along with the intermediation approach, which has been applied in this paper. Investigation of changes in efficiency over time by employing the data envelopment analysis approach could yet be another extension to the paper. Originality/value - This paper provides new empirical evidence on the productivity of NBFIs, particularly in a developing economy.