The profit efficiency analysis of malaysian commercial banks: A Data Envelopment Analysis (DEA)

Published: Aug 30, 2023

Abstract:

Purpose: This study aims to measure and compare the profit efficiency of local and international commercial banks in Malaysia before and during the COVID-19 pandemic in accordance with the new Basel Committee III guidelines, which mandate banks to adopt a systematic approach to deal with uncertain economic conditions, including events such as the COVID-19 pandemic.

Research methodology: This study uses Data Envelopment Analysis (DEA), a non-parametric method based on linear mathematical programming, to measure the efficiency of local and international commercial banks in Malaysia.

Results: The analysis revealed that local international commercial banks were more efficient than local commercial banks before and during the COVID-19 crisis.

Limitations: Potential areas for future research involve extending the application of Data Envelopment Analysis (DEA) and examining various dimensions and metrics about different countries, as each country possesses distinct financial contexts.

Contribution: This study contributes to the existing body of literature on the profit efficiency of local and international banks. It provides insights that can assist the government in formulating appropriate regulations to enhance banks’ profit efficiency, thereby improving their overall performance.

Keywords:
1. Data Envelopment Analysis (DEA)
2. profit efficiency
3. liquidity risk
4. Commercial Banks
5. Malaysia
Authors:
1 . Nursyazfaliana Mohd Arif
2 . Ayunazira Nasir
3 . Rakin Syuwari Rodrigo
4 . Imbarine Bujang
5 . Siti Julea Supar
How to Cite
Arif, N. M., Nasir, A., Rodrigo, R. S., Bujang, I., & Supar, S. J. (2023). The profit efficiency analysis of malaysian commercial banks: A Data Envelopment Analysis (DEA). Annals of Management and Organization Research, 4(3), 211–224. https://doi.org/10.35912/amor.v4i3.1565

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References

    Abidin, Z., Prabantarikso, R. M., Wardhani, R. A., & Endri, E. (2021). Analysis of bank efficiency between conventional banks and regional development banks in Indonesia. The Journal of Asian Finance, Economics and Business, 8(1), 741-750.

    Adongo, J. (2005). Measuring the Althernative Profit X-efficiency of Namibia's Banking Sector: Namibian Economic Policy Research Unit.

    Alber, N., Elmofty, M., Kishk, I., & Sami, R. (2019). Banking efficiency: concepts, drivers, measures, literature and conceptual model. Drivers, Measures, Literature and Conceptual Model (January 5, 2019).

    Arbelo, A., Arbelo-Pérez, M., & Pérez-Gómez, P. (2021). Profit efficiency as a measure of performance and frontier models: a resource-based view. BRQ Business Research Quarterly, 24(2), 143-159.

    Bader, M. K. I., Mohamad, S., Ariff, M., & Shah, T. H. (2008). Cost, revenue, and profit efficiency of Islamic versus conventional banks: international evidence using data envelopment analysis. Islamic economic studies, 15(2).

    Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management science, 30(9), 1078-1092.

    Berger, A. N., & Demirgüç-Kunt, A. (2021). Banking research in the time of COVID-19. Journal of Financial Stability, 57, 100939.

    Bertola, G., Dabušinskas, A., Hoeberichts, M., Izquierdo, M., Kwapil, C., Montornès, J., & Radowski, D. (2010). Price, wage and employment response to shocks: Evidence from the WDN survey.

    Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2(6), 429-444.

    Coelli, T. J. (1995). Recent developments in frontier modelling and efficiency measurement. Australian Journal of agricultural economics, 39(3), 219-245.

    Curtis, P. G., Hanias, M., Kourtis, E., & Kourtis, M. (2020). Data envelopment analysis (DEA) and financial ratios: A pro-stakeholders’ view of performance measurement for sustainable value creation of the wind energy.

    Endri, E., Fatmawatie, N., Sugianto, S., Humairoh, H., Annas, M., & Wiwaha, A. (2022). Determinants of efficiency of Indonesian Islamic rural banks. Decision Science Letters, 11(4), 391-398.

    Färe, R., Grosskopf, S., & Weber*, W. L. (2004). The effect of risk-based capital requirements on profit efficiency in banking. Applied Economics, 36(15), 1731-1743.

    Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society Series A: Statistics in Society, 120(3), 253-281.

    Hidayat, T., Masyita, D., Nidar, S. R., Febrian, E., & Ahmad, F. (2021). The effect of COVID-19 on credit and capital risk of state-owned bank in Indonesia: A system dynamics model. System, 6(20), 33.

    Ikhwan, I., & Riani, R. (2022). The efficiency level of Indonesian banks in the Covid-19 pandemic era and its determinant. Jurnal Ekonomi & Keuangan Islam, 221-235.

    Iršová, Z., & Havránek, T. (2010). Measuring bank efficiency: a meta-regression analysis. Prague Economic Papers, 19(10), 307-328.

    Jemal, S. (2022). The Effect of Supply Chain Management on the Performance of Commercial Bank Organization in Ethiopia's Case of Jimma City. International Journal of Financial, Accounting, and Management, 4(3), 285-302.

    Koutsoyiannis, A. (1979). Modern Microeconomics. (No Title).

    Kozak, S. (2021). The impact of COVID-19 on bank equity and performance: The case of central eastern south European countries. Sustainability, 13(19), 11036.

    Krmac, E., & Mansouri Kaleibar, M. (2022). A comprehensive review of data envelopment analysis (DEA) methodology in port efficiency evaluation. Maritime Economics & Logistics, 1-65.

    Kuosmanen, T., Cherchye, L., & Sipiläinen, T. (2006). The law of one price in data envelopment analysis: Restricting weight flexibility across firms. European Journal of Operational Research, 170(3), 735-757.

    Mateev, M., Sahyouni, A., & Al Masaeid, T. (2022). Bank performance before and during the COVID-19 crisis: Does efficiency play a role? Review of Managerial Science, 1-54.

    Maudos, J. n., Pastor, J. M., Perez, F., & Quesada, J. (2002). Cost and profit efficiency in European banks. Journal of international financial markets, institutions and money, 12(1), 33-58.

    Oranefo, P., & Egbunike, C. (2022). Debt Financing and Firm Valuation of Quoted Non-Financial Firms in Nigeria Stock Exchange. International Journal of Financial, Accounting, and Management, 4(2), 199-218.

    Pilar, P.-G., Marta, A.-P., & Antonio, A. (2018). Profit efficiency and its determinants in small and medium-sized enterprises in Spain. BRQ Business Research Quarterly, 21(4), 238-250.

    Ramasamy, D. K. (2020). Impact Analysis in Banking, Insurance and Financial services industry due to COVID-19 Pandemic. Pramana Research Journal, 10(8).

    Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297-307.

    Resende, J., & Silva, E. (2007). A profit efficiency perspective on the future strategic positioning of the Portuguese banks. CEF. UP Working Papers, Faculdade de Economia, Universidade do Porto, 1-32.

    Sarker, N., & Bhowmik, P. K. (2021). Bank Liquidity Risk: Significance of Financial Disclosure and Governance Practice. Asian economic and financial review, 11(9), 724-744.

    Selamzade, F., & Baghirov, A. (2022). Measuring the Efficiency of the Azerbaijan Banking System with Data Envelopment Analysis (2015-2019). Anemon Mu? Alparslan Üniversitesi Sosyal Bilimler Dergisi, 10(1), 119-137.

    Shabrina, W., & Hadian, N. (2021). The influence of current ratio, debt to equity ratio, and return on assets on dividend payout ratio. International Journal of Financial, Accounting, and Management, 3(3), 193-204.

    Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American economic review, 71(3), 393-410.

    Tharu, N. K., & Shrestha, Y. M. (2019). The influence of bank size on profitability: an application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.

    Tipuric, D., Krajnovic, A., & Recker, N. (2022). Economic and Social Development (Book of Proceedings), 80th International Scientific Conference on Economic and Social. Dubrovnik, 1, 02.

    Waitherero, K. F., Muchina, S., & Macharia, S. (2021). The role of liquidity risk in augmenting firm value: lessons from savings and credit cooperatives in Kenya. International Journal of Financial, Accounting, and Management, 2(4), 295-304.

    Wicksell, K. (1936). Interest and prices: Ludwig von Mises Institute.

    Zhu, J., & Zhu, J. (2014). Data envelopment analysis. Quantitative Models for Performance Evaluation and Benchmarking: Data Envelopment Analysis with Spreadsheets, 1-9.

  1. Abidin, Z., Prabantarikso, R. M., Wardhani, R. A., & Endri, E. (2021). Analysis of bank efficiency between conventional banks and regional development banks in Indonesia. The Journal of Asian Finance, Economics and Business, 8(1), 741-750.
  2. Adongo, J. (2005). Measuring the Althernative Profit X-efficiency of Namibia's Banking Sector: Namibian Economic Policy Research Unit.
  3. Alber, N., Elmofty, M., Kishk, I., & Sami, R. (2019). Banking efficiency: concepts, drivers, measures, literature and conceptual model. Drivers, Measures, Literature and Conceptual Model (January 5, 2019).
  4. Arbelo, A., Arbelo-Pérez, M., & Pérez-Gómez, P. (2021). Profit efficiency as a measure of performance and frontier models: a resource-based view. BRQ Business Research Quarterly, 24(2), 143-159.
  5. Bader, M. K. I., Mohamad, S., Ariff, M., & Shah, T. H. (2008). Cost, revenue, and profit efficiency of Islamic versus conventional banks: international evidence using data envelopment analysis. Islamic economic studies, 15(2).
  6. Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management science, 30(9), 1078-1092.
  7. Berger, A. N., & Demirgüç-Kunt, A. (2021). Banking research in the time of COVID-19. Journal of Financial Stability, 57, 100939.
  8. Bertola, G., Dabušinskas, A., Hoeberichts, M., Izquierdo, M., Kwapil, C., Montornès, J., & Radowski, D. (2010). Price, wage and employment response to shocks: Evidence from the WDN survey.
  9. Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2(6), 429-444.
  10. Coelli, T. J. (1995). Recent developments in frontier modelling and efficiency measurement. Australian Journal of agricultural economics, 39(3), 219-245.
  11. Curtis, P. G., Hanias, M., Kourtis, E., & Kourtis, M. (2020). Data envelopment analysis (DEA) and financial ratios: A pro-stakeholders’ view of performance measurement for sustainable value creation of the wind energy.
  12. Endri, E., Fatmawatie, N., Sugianto, S., Humairoh, H., Annas, M., & Wiwaha, A. (2022). Determinants of efficiency of Indonesian Islamic rural banks. Decision Science Letters, 11(4), 391-398.
  13. Färe, R., Grosskopf, S., & Weber*, W. L. (2004). The effect of risk-based capital requirements on profit efficiency in banking. Applied Economics, 36(15), 1731-1743.
  14. Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society Series A: Statistics in Society, 120(3), 253-281.
  15. Hidayat, T., Masyita, D., Nidar, S. R., Febrian, E., & Ahmad, F. (2021). The effect of COVID-19 on credit and capital risk of state-owned bank in Indonesia: A system dynamics model. System, 6(20), 33.
  16. Ikhwan, I., & Riani, R. (2022). The efficiency level of Indonesian banks in the Covid-19 pandemic era and its determinant. Jurnal Ekonomi & Keuangan Islam, 221-235.
  17. Iršová, Z., & Havránek, T. (2010). Measuring bank efficiency: a meta-regression analysis. Prague Economic Papers, 19(10), 307-328.
  18. Jemal, S. (2022). The Effect of Supply Chain Management on the Performance of Commercial Bank Organization in Ethiopia's Case of Jimma City. International Journal of Financial, Accounting, and Management, 4(3), 285-302.
  19. Koutsoyiannis, A. (1979). Modern Microeconomics. (No Title).
  20. Kozak, S. (2021). The impact of COVID-19 on bank equity and performance: The case of central eastern south European countries. Sustainability, 13(19), 11036.
  21. Krmac, E., & Mansouri Kaleibar, M. (2022). A comprehensive review of data envelopment analysis (DEA) methodology in port efficiency evaluation. Maritime Economics & Logistics, 1-65.
  22. Kuosmanen, T., Cherchye, L., & Sipiläinen, T. (2006). The law of one price in data envelopment analysis: Restricting weight flexibility across firms. European Journal of Operational Research, 170(3), 735-757.
  23. Mateev, M., Sahyouni, A., & Al Masaeid, T. (2022). Bank performance before and during the COVID-19 crisis: Does efficiency play a role? Review of Managerial Science, 1-54.
  24. Maudos, J. n., Pastor, J. M., Perez, F., & Quesada, J. (2002). Cost and profit efficiency in European banks. Journal of international financial markets, institutions and money, 12(1), 33-58.
  25. Oranefo, P., & Egbunike, C. (2022). Debt Financing and Firm Valuation of Quoted Non-Financial Firms in Nigeria Stock Exchange. International Journal of Financial, Accounting, and Management, 4(2), 199-218.
  26. Pilar, P.-G., Marta, A.-P., & Antonio, A. (2018). Profit efficiency and its determinants in small and medium-sized enterprises in Spain. BRQ Business Research Quarterly, 21(4), 238-250.
  27. Ramasamy, D. K. (2020). Impact Analysis in Banking, Insurance and Financial services industry due to COVID-19 Pandemic. Pramana Research Journal, 10(8).
  28. Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297-307.
  29. Resende, J., & Silva, E. (2007). A profit efficiency perspective on the future strategic positioning of the Portuguese banks. CEF. UP Working Papers, Faculdade de Economia, Universidade do Porto, 1-32.
  30. Sarker, N., & Bhowmik, P. K. (2021). Bank Liquidity Risk: Significance of Financial Disclosure and Governance Practice. Asian economic and financial review, 11(9), 724-744.
  31. Selamzade, F., & Baghirov, A. (2022). Measuring the Efficiency of the Azerbaijan Banking System with Data Envelopment Analysis (2015-2019). Anemon Mu? Alparslan Üniversitesi Sosyal Bilimler Dergisi, 10(1), 119-137.
  32. Shabrina, W., & Hadian, N. (2021). The influence of current ratio, debt to equity ratio, and return on assets on dividend payout ratio. International Journal of Financial, Accounting, and Management, 3(3), 193-204.
  33. Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American economic review, 71(3), 393-410.
  34. Tharu, N. K., & Shrestha, Y. M. (2019). The influence of bank size on profitability: an application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.
  35. Tipuric, D., Krajnovic, A., & Recker, N. (2022). Economic and Social Development (Book of Proceedings), 80th International Scientific Conference on Economic and Social. Dubrovnik, 1, 02.
  36. Waitherero, K. F., Muchina, S., & Macharia, S. (2021). The role of liquidity risk in augmenting firm value: lessons from savings and credit cooperatives in Kenya. International Journal of Financial, Accounting, and Management, 2(4), 295-304.
  37. Wicksell, K. (1936). Interest and prices: Ludwig von Mises Institute.
  38. Zhu, J., & Zhu, J. (2014). Data envelopment analysis. Quantitative Models for Performance Evaluation and Benchmarking: Data Envelopment Analysis with Spreadsheets, 1-9.