Effiecieny of Islamic Banking in Malaysia

Efficiency of Islamic Banks in Malaysia

Mariani Abdul Majid*
NOR GHANI MD. NOR**
FATHIN FAIZAH SAID

ABSTRACT

IN RECENT YEARS, MALAYSIAN ISLAMIC BANKS HAVE TO OPERATE IN AN INCREASINGLY COMPETITIVE ENVIRONMENT. THIS TREND IS EXPECTED TO CONTINUE AS THE COMPETITION FROM CONVENTIONAL BANKS PICKS UP, PARTLY IN RESPONSE TO THE ASEAN FREE TRADE AGREEMENT (AFTA), BUT ALSO IN RESPONSE TO THE GENERAL GLOBALIZATION OF MARKETS. HOW ISLAMIC BANKS WILL BE AFFECTED BY THE INCREASED COMPETITIVE PRESSURES DEPENDS IN PART ON HOW EFFICIENTLY THEY ARE RUN. THIS PAPER EXAMINES THE PRODUCTIVE EFFICIENCY OF MALAYSIAN COMMERCIAL (ISLAMIC AND CONVENTIONAL) BANKS OVER THE 1993 TO 2000 TIME PERIOD. THE GOAL OF THE ANALYSIS IS TO IDENTIFY THE EFFICIENCY LEVEL OF ISLAMIC BANKS COMPARED TO OTHER COMMERCIAL BANKS IN MALAYSIA. USING THE STOCHASTIC FRONTIER COST FUNCTION APPROACH, EFFICIENCY SCORES WERE DETERMINED FOR EACH BANK TO DETERMINE THEIR RELATIVE POSITIONS ON THE EFFICIENCY LADDER. AN INEFFICIENCY MODEL IS ESTIMATED TO LINK THE INEFFICIENCY OF INPUT USE TO PRODUCE OUTPUT TO OTHER FACTORS. THE RESULTS SHOW THAT THE EFFICIENCY LEVEL OF ISLAMIC BANKS IS NOT STATISTICALLY DIFFERENT FROM THE CONVENTIONAL BANKS. IN ADDITION THERE IS NO EVIDENCE TO SUGGEST THAT BANK EFFICIENCY IS A FUNCTION OF OWNERSHIP STATUS I.E. PUBLIC OR PRIVATE, AND FOREIGN OR LOCAL.

1. Introduction

During the early years after independence, foreign banks dominated the Malaysian banking scene. For instance, two years after independence (1959), there were only 8 local banks out of the 26 commercial banks in operation. Twenty years later, the role played by the local banks improve considerably when the number of commercial banks increased to 38 with 21 domestic banks and 16 foreign banks in 1982. The number shrank considerably (although the split between local and foreign banks is maintained) in the 1990s following a spate of ‘mergers and take-overs’ as banks try to secure particular niches

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