Studies on efficiency of banking using stochastic frontier approaches did not start until the authors of started their own. In the nonparametric, DEA is the extensively used method. In the parametric studies, SFA is often used. On the other hand, the nonparametric researches use Data Envelopment Analysis (DEA), Malmquist Index, Tornqvist Index, and Distance Functions to measure bank efficiency. The methods used in parametric approach are SFA, Thick Frontier Approach (TFA), and DFA. In the banking literature, two major methods for the empirical estimation of bank efficiency are often used: parametric and nonparametric approaches however, there is no accord regarding which of the major approach is superior. Most past studies used the half-normal and truncated normal distribution as assumption on the inefficiency effects model because of the ease of estimation and interpretation. SFA employs a composed error model in which inefficiencies are assumed to follow an asymmetric distribution, usually the half-normal, while random errors are assumed to follow a symmetric distribution, usually the standard normal. 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. In the present study, the parametric SFA approach has been employed to estimate the technical efficiency of Malaysian domestic banks for the period 2005–2010. Selection of Stochastic Frontier Analysis (SFA) approach or Data Envelopment Analysis (DEA) approach for measuring efficiency is controversial. 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). Thus, banks not only need to be profitable, but also efficient otherwise, it may create instability and obstacle in the process of development in any economy.
Failure to do some satisfactory performance may damage the bank's reputation, leading to customer defections and breakdowns with other key stakeholders, such as deterioration or loss of investor confidence in management. 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.īank's performance measurement and assessment are one of the most important agendas in today's business world. 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 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. A parametric approach, Stochastic Frontier Approach (SFA), is used in this analysis. 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. 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. Banking system plays an important role in the economic development of any country.
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