A Cobb Douglas Stochastic Frontier Model on Measuring Domestic Bank Efficiency in Malaysia

Md. Zobaer Hasan,Adli Mustafa,Anton Abdulbasah Kamil,Md. Azizul Baten,Alejandro Raul Hernandez Montoya

doi:10.1371/journal.pone.0042215

Md. Zobaer Hasan, Adli Mustafa + Show 3 more

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https://doi.org/10.1371/journal.pone.0042215

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Abstract

Banking system plays an important role in the economic development of any country. Domestic banks, which are the main components of the banking system, have to be efficient; otherwise, they may create obstacle in the process of development in any economy. This study examines the technical efficiency of the Malaysian domestic banks listed in the Kuala Lumpur Stock Exchange (KLSE) market over the period 2005–2010. A parametric approach, Stochastic Frontier Approach (SFA), is used in this analysis. The findings show that Malaysian domestic banks have exhibited an average overall efficiency of 94 percent, implying that sample banks have wasted an average of 6 percent of their inputs. Among the banks, RHBCAP is found to be highly efficient with a score of 0.986 and PBBANK is noted to have the lowest efficiency with a score of 0.918. The results also show that the level of efficiency has increased during the period of study, and that the technical efficiency effect has fluctuated considerably over time.

Highlights

Bank’s performance measurement and assessment are one of the most important agendas in today’s business world
The objective of this paper is to investigate the level of technical efficiency of the domestic banks in Malaysia, which are listed in the Kuala Lumpur Stock Exchange (KLSE)
The reason for using the Stochastic Frontier Analysis (SFA) approach, instead of the Data Envelopment Analysis (DEA) approach, in this study is as follows: Addition of a variable in the DEA model leads to an extra constraint, which affects the DEA efficiency results, even though the added variable may be statistically insignificant in the SFA model

Summary

Introduction

Bank’s performance measurement and assessment are one of the most important agendas in today’s business world. The objective of this paper is to investigate the level of technical efficiency of the domestic banks in Malaysia, which are listed in the Kuala Lumpur Stock Exchange (KLSE). Selection of Stochastic Frontier Analysis (SFA) approach or Data Envelopment Analysis (DEA) approach for measuring efficiency is controversial [1]. The parametric SFA approach has been employed to estimate the technical efficiency of Malaysian domestic banks for the period 2005–2010. The reason for using the SFA approach, instead of the DEA approach, in this study is as follows: Addition of a variable in the DEA model leads to an extra constraint, which affects the DEA efficiency results, even though the added variable may be statistically insignificant in the SFA model

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