Dissertation on "Malaysia Is Characterized by the World Bank"

Dissertation 53 pages (14609 words) Sources: 35

[EXCERPT] . . . .

Malaysia is characterized by the World Bank as being a middle-income country. Modeled after the Anglo-American system, Malaysian banks are restricted in their operation to accepting deposits, granting loans and other specified activities, and they are kept at an arm's length from corporate governance and management; however, beginning in the 1970s, the soundness of the Malaysian banking system was increasingly compromised by the political leadership's policy that used financial policy as an instrument for inter-ethnic income redistribution. Since 1970, though, the nation has transformed itself from a producer of raw materials into an emerging multi-sector economy with much of the credit for the progress to date being attributed to the country's recent political leadership. An efficient banking system plays an important role in the economic development of any country. Commercial banks, which are the main component of the banking system, have to be efficient otherwise they will create maladjustments and impediments in the process of development in any economy. The purpose of this study was to identify the optimum approach and metrics for measuring the efficiency of Malaysian banks and to analyze archival financial performance data using the optimum approach for measuring the efficiency of Malaysian banks to determine historic efficiency levels in an effort to identify opportunities for improvement in the future.

Table of Contents

1.0

Chapter 1: Introduction

1.1

Problem Statement

1.2

Purpose of the Study

1.3

Importance of the Study

1.4

Rationale of the Study

1.5

Overview of the Study

Chapter 2: Literature Review

2.1. Introduction

2.2 Overview of the Malaysian banking system

2.3. SFA in Malaysia

2.4. SFA in Other Countries

2.5. DFA in Malaysia

2.6. DFA in Other Countries

2.7. DEA in Malaysia

2.8. DEA in Other Countries

2.9. NBIFs Research

2.10 BFIs Research

2.11. Other Research

2.12. Conclusion

Chapter 3: Methodology

3.1. Introduction

3.2. Description of the Study Approach

3.3. Data-gathering Method

3.4. Research Method and Database of Study

3.5. Research Variables

3.6. Research Hypothesis

3.7. Conclusion

4.0. Data Analysis

5.0. Summary and Conclusion

An Analysis of the Efficiency of Malaysian Banks

1.0 Introduction

The past two centuries have been fateful ones for Malaysia. After the United Kingdom established colonies and protectorates in what is modern Malaysia during the 18th and 19th centuries, the mid-20th century witnessed these regions being occupied by Japan during World War II, only to revert to British control after the war (Malaysia 2010). By 1948, other events swept across what is now modern Malaysia when the territories under British control, including Singapore, established the Federation of Malaya until 1957 when they achieved their independence (Malaysia 2010). The modern country of Malaysia was created in 1963, but the country's early history was far from uneventful as well, with fundamental changes in organization taking place that culminated in Singapore's withdrawal from the confederation in 1965 (Malaysia 2010). More recently, a series of economic reforms and an emphasis on diversifying the nation's economic base have succeeded in providing a number of value-added industries for Malaysia that have included manufacturing and services industries, and increasingly, the travel and tourism trade (Malaysia 2010).

Today, Malaysia is characterized by the World Bank as being a middle-income country that has transformed itself from a producer of raw materials into an emerging multi-sector economy with much of the credit for the progress to date being attributed to the country's political leadership. For example, following his accession to office in 2003, former Prime Minister Abdullah attempted to transform the Malaysian economy by introducing initiatives designed to improve the value-added production chain through increased investments in high technology industries, medical technology, and pharmaceuticals; these initiatives have been continued under the nation's current Prime Minister Najib, as well (Malaysia, 2010). The Najib administration has continued to implement initiatives that are intended to increase foreign demand for Malaysian products while increasing the self-sufficiency of the country to reduce the need for high levels of imported goods (Malaysia 2010).

On the one hand, the central bank in Malaysia continues to enjoy solid foreign exchange reserves and the nation's mature regulatory system has reduced Malaysia's exposure to higher-risk financial instruments as well as the lingering global economic downturn (Malaysia 2010). On the other hand, though, the country has not been immune to these economic forces and demand for Malaysia's products in the international community has hampered economic growth for the past two years or so (Malaysia 2010). There are signs, though, that the worst is over and that Malaysian exports and economic growth are on the rebound today. These trends were further amplified most recently in June 2010 when Prime Minister Najib launched the Tenth Malaysia Plan that contained further economic reforms, several of which have already been implemented in order to attract new sources of foreign direct investment in response to a lull in recent years (Malaysia, 2010).

In his book, Financial Liberalization and the Economic Crisis in Asia, Lee (2003) states that compared with other developing countries, Malaysia has a highly developed financial system with its history dating back to the 18th and 19th century British colonial era. Not surprisingly, being one of the legacies of the country's colonial era, the modern Malaysian financial system follows the Anglo-American system in which Malaysian banking operations are limited to accepting deposits, issues loans and other financial services activities that are characteristic of the Anglo-American model (Lee 2003), but this traditional role has expanded in recent years. According to Rao and Tiwari, "Since the process of liberalization and reform of the financial sector were set in motion in 1991, banking has undergone significant changes. The underlying objectives of these were to make the system more competitive, efficient and profitable" (2008:73).

Although there remains a dearth of relevant studies concerning the efficiency of Malaysian banks per se, an earlier study by Katib found that Malaysian banks during the period 1989 to 1995 were not operating efficiently to combine their inputs and on average, technical efficiency languished at just 68 per cent to 80 per cent. Moreover, Katib also determined that banks that had elevated levels of technical efficiency were characterized by lower labor costs, suggesting that efficient Malaysian banks are more conscious of controlling costs than those which are not. Further complicating the analysis of efficiency in Malaysian banks has been their changing role in Malaysian society. For instance, according to Katib and Matthews, "While maintaining its traditional role in financial intermediation, offering the basic banking products and services, banks have been moving towards offering more and more nonbanking financial services" (89). There have been also some signs that political imperatives have adversely affected the ability of the Malaysia banking industry to operate efficiently (Lee 2003), an issue that directly relates to the problem to be considered in this study which is discussed further below.

1.1

Problem Statement

Given the importance of an efficient banking system to a country economic development, it is not surprising that the topic has received a great deal of attention in recent years. For example, according to Katib and Matthews, "Efficiency in the banking sector has the subject of numerous investigations" (89). Moreover, Dietsch and Vivas emphasize that there is a basic lack of research devoted to this issue: "There appears to be only six studies in the efficiency the effects of the expected literature that attempts to determine and compare banking performances differences across-countries" (1996: 3).

Since that writing, though, there have been a number of other analyses concerning how best to define and analyze the efficiency of banks in different countries. For example, in their recent study, "Evaluating Efficiency of Malaysian Banks Using Data Envelopment Analysis," Tahir, Bakar and Haron (2009) emphasize that an efficient banking system is an essential element for the economic development of any country. According to these authorities, "Commercial banks, which are the main component of the banking system, have to be efficient otherwise they will create maladjustments and impediments in the process of development in any economy" (Tahir et al. 2009:96). Since the late 20th century, there have been a number of forces at work that have made efficiency in the commercial banking sector more important than ever, but also more challenging. In this regard, Tahir and his associates emphasize that, "Technological advancements and globalisation have added to the pressure on the part of the banks to maintain market shares so as to survive and remain competitive. Competition from foreign banks as well from domestic banks themselves creates greater pressure" (2009:96). This point is also made by Alam who emphasizes that, "The banking sector is constantly and rapidly evolving; the last two decades, in particular, represent a substantial metamorphosis for banking sectors in countries around the world" (2001:121).

The banking sector in Malaysia has certainly not been immune to these forces as well. Consequently, commercial banks are increasingly being required to remain profitable while simultaneously becoming more efficient in the delivery of banking products and services in an increasingly globalized environment that is characterized by competition from domestic and international sources (Tahir et al. 2009). While all organizations seek to become… READ MORE

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