Oligopoly Market

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PROSIDING PERKEM VI, JILID 1 (2011) 546 – 560 ISSN: 2231-962X

Review of Malaysian Retail Banking Market: An Industrial Organizational Perspective Nafisah Mohammed (nafisah@ukm.my) Pusat Pengajian Ekonomi Fakulti Ekonomi dan Pengurusan Universiti Kebangsaan Malaysia Suhaila Abdul Jalil ( suhaila@upm.edu.my) Jabatan Ekonomi Fakulti Ekonomi dan Pengurusan Universiti Putra Malaysia

ABSTRACT The attempt of this paper is to analyze the Malaysian retail banking market within structure-conductperformance paradigm framework which roots from the industrial organizational field. The Malaysian retail banking market practices dual banking system which consists of conventional and Islamic banking firms. Therefore, the analysis in this paper will focus on the structure, conduct and performance of both banking system descriptively. The structure of the retail banking market will also focused on several aspects such as market size and distribution, market competitiveness, market delineation and barriers to entry. While, marketing expenses, distribution of the branches and the quality of services will be analyzed to evaluate the banking firms conduct in the market. Meanwhile, the performance of the banking firms will be analyzed from two perspectives namely, ratio analysis and welfare perspectives. Overall, the study shows that both domestic and foreign banking firms play a significant role in the Malaysian retail banking market. Keywords: Banking; Industrial Organization; Structure-conduct-performance;

INTRODUCTION According to Fama (1985), both capital market and banking market establish strong relationships between borrowers and lenders but banks have comparative advantage compare to capital market. This is due to the superior capability of banks that can provide loans or debt to the borrowers with inside information. For instance, the bank will gather the information of the customers such as their income and expenditure pattern while process their loan application. Furthermore, the theory of asymmetric information, Diamond (1984) show that special role of bank is to minimize the agency cost between borrowers and lenders by monitoring the borrowers at low cost. On the other hand, the special function of banks is to transform illiquid assets into liquid liabilities, providing insurance against liquidity risk with private information to agents. Hence, banks arise because of incomplete and asymmetric information in the financial markets. Banks play very important and active role in the economic development of a country via various channel of distribution. For instance, banks promote capital formation, investment in new enterprises, promote the development of trade and industry, strong influence on the country’s economy and help to promote export. Therefore, an effective and efficient banking system will bring about rapid growth in the various sectors of the economy. In Malaysia both Islamic and conventional banks contribute towards the expansion in the banking system and hence, to the economic growth of the country. Banks become a major source of finance in the process of development and also considered as a ‘life-line’ of modern trade and commerce. For instance, total loan provided by retail banking system in Malaysia is about RM65,503.8 million in 2010. The total loan disbursed by the banks is used for various economic purposes in order to stimulate consumption and investment activities which will continually enhance economy growth. Base on these reasons, banking industry has been one of the selected industries that may help Malaysia to achieve the status of high income country. According to the Central Bank of Malaysia report the banking system constitutes about 50 percent of the financial system’s assets. The development and the better performance of financial system tend to be the strong reason of the growth in Malaysia service sector by 1.6 percent in the second quarter of 2009.

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