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Technical Efficiency of Commercial Banks in Malaysia: An Application of Window Data Envelopment Analysis

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  • Wahidudin, Ahmad Nazri

Abstract

This paper analyzes technical efficiency of domestic commercial banks in Malaysia between 1995 and 2009 by using the Data Envelopment Analysis (DEA) window analysis. By this approach, the technical efficiency is analyzed sequentially with a certain window width (i.e. the number of years in a window) using a panel data of five domestic banks. The main idea is to capture the temporal impact on bank technical efficiency and see its short-run evolution from one window to another, in particular the pure technical efficiency (X-efficiency or managerial efficiency) and scale efficiency. By this, the study avoids the comparison of banks in different years as separate observations measured against each other, which can be unrealistic because of the significant technological diffusion in banking over the period under analysis. The results suggest that on average the domestic commercial banks have some degree of inefficiency, which is more so due to pure technical rather than scale effects. Thus, Malaysian commercial banks should gain more from reducing the input quantities used or increasing the output quantities produced. The commercial banks should not worry too much about not choosing the correct scale for production though the study found out that on average the banks have not fully exhausted economies of scale.

Suggested Citation

  • Wahidudin, Ahmad Nazri, 2010. "Technical Efficiency of Commercial Banks in Malaysia: An Application of Window Data Envelopment Analysis," MPRA Paper 45136, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:45136
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    References listed on IDEAS

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    1. Sufian, F., 2004. "The Eficiency Effects of Bank Mergers and Acquisitions in a Developing Economy: Evidence from Malaysia," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(4), pages 53-74.
    2. Igor Jemric & Boris Vujcic, 2002. "Efficiency of Banks in Croatia: A DEA Approach*," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 44(2-3), pages 169-193, September.
    3. Peristiani, Stavros, 1997. "Do Mergers Improve the X-Efficiency and Scale Efficiency of U.S. Banks? Evidence from the 1980s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 326-337, August.
    4. Drake, Leigh & Hall, Maximilian J. B., 2003. "Efficiency in Japanese banking: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 891-917, May.
    5. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    6. Robert Webb, 2003. "Levels of efficiency in UK retail banks: a DEA window analysis," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(3), pages 305-322.
    7. Miller, Stephen M. & Noulas, Athanasios G., 1996. "The technical efficiency of large bank production," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 495-509, April.
    8. Fadzlan Sufian & Muhd-Zulkhibri Abdul Majid, 2005. "Post-merger Banks’ Efficiency and Risk in Emerging Market: Evidence from Malaysia," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 16-37, November.
    9. Chambers, Nurgul & Cifter, Atilla, 2006. "The Effect of Scale on Productivity of Turkish Banks in the Post-Crises Period: An Application of Data Envelopment Analysis," MPRA Paper 2487, University Library of Munich, Germany.
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    Cited by:

    1. Michael O. Nyong, 2017. "Relative Efficiency of Commercial Banks in Nigeria: A Nonparametric Mathematical Optimization Analysis," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(2), pages 27-49, February.

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    More about this item

    Keywords

    pure technical efficiency; scale efficiency; bank productivity; DEA;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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