Technical Efficiency of Commercial Banks in Malaysia: An Application of Window Data Envelopment Analysis

Abstract

This paper analyzes technical efficiency of domestic commercial banks in Malaysia between 1995 and 2009 by using the Data Envelopment Analysis (DEA) window analysis. By this approach, the technical efficiency is analyzed sequentially with a certain window width (i.e. the number of years in a window) using a panel data of five domestic banks. The main idea is to capture the temporal impact on bank technical efficiency and see its short-run evolution from one window to another, in particular the pure technical efficiency (X-efficiency or managerial efficiency) and scale efficiency. By this, the study avoids the comparison of banks in different years as separate observations measured against each other, which can be unrealistic because of the significant technological diffusion in banking over the period under analysis. The results suggest that on average the domestic commercial banks have some degree of inefficiency, which is more so due to pure technical rather than scale effects. Thus, Malaysian commercial banks should gain more from reducing the input quantities used or increasing the output quantities produced. The commercial banks should not worry too much about not choosing the correct scale for production though the study found out that on average the banks have not fully exhausted economies of scale.