Page 317 - Contributed Paper Session (CPS) - Volume 4

CPS2245 Azrie Tamjis

The impact of Financial Sector Master Plan on
cost efficiency of Malaysian Bank:
an analysis of Stochastic Frontier Analysis
Azrie Tamjis
Financial Conglomerates Supervision Department, Bank Negara Malaysia

Abstract
The Asian financial crisis in 1997–98 left a severe impact on Malaysia’s
economy and banking system. This has forced the Malaysian government to
undertake financial restructuring initiatives to restore market and public
confidence, and to meet the ongoing challenges associated with market
structure, financial innovation and globalisation. Therefore, Bank Negara
Malaysia (BNM) introduced a ten-year Financial Sector Master Plan (FSMP) to
strengthen domestic banks and the regulatory structure, and to promote the
banks’ efficiency by stimulating a competitive banking industry through
financial liberalisation. The crisis for banks in Malaysia and the region has been
extensively studied. However, empirical studies of the post-crisis period, and
the implementation of the FSMP, remain limited. Hence, a data set of all banks
in Malaysia, which covers the period 2000–2011, was employed to examine
the effect of the FSMP’s initiatives on Malaysian banks’ efficiency between
2000 and 2011. To measure this efficiency, this study employs parametric
model namely, stochastic frontier analysis (SFA) cost efficiency is used in a
one-stage SFA model, which includes control variables (e.g. capital adequacy,
asset quality and liquidity) and environmental variables (e.g. ownership, size,
specialisation, deregulation periods and market structure) in the model
specifications. The level of cost efficiency of Malaysian banks worsened over
the years 2000–2011, with average cost efficiency during this period was at
76.5%. Despite the various liberalisation measures introduced to the banking
industry – particularly during the three phases of the FSMP; 2000–2003; 2004–
2007; 2008–2011 – cost efficiency trended downward, due to the effects of
consolidation by domestic banks, deregulation of interest rates, the
introduction of foreign Islamic banks, and the global credit crisis. Banks in
Malaysia were forced to adjust their inputs and outputs to the rapid changes
in the banking industry, which might have made a negative impact on cost
efficiency.

Keywords
Financial Sector Master Plan; Cost Efficiency; Stochastic Frontier Analysis;
Malaysian Banks

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