Malmquist Indices of Productivity Change in Malaysian Islamic Banking Industry: Foreign versus Domestic Banks

Abstract

Do Malaysian Islamic banks performed productively in its role as an intermediary? Although the phenomenon of Islamic banking and finance has developed significantly in recent years, only a few studies have tackled this question. To address this issue, this paper attempts to provide new empirical evidence on the performance of Malaysian Islamic banks over the period of 2001-2004. This paper makes significant contribution on at least three fronts. Firstly, this will be the first study to investigate the relative productivity between the domestic and foreign banks Islamic Banking operations. Secondly, the period chosen has also witnessed the intensification of competition among the domestic and foreign banks in Malaysia, brought about by the Malaysian government?s move to further liberalise the banking system. Thirdly, the period chosen has witnessed growing awareness among Malaysian consumers about Islamic financial products and services, which renders the importance of the efficiency and productivity issues from both the policymakers and public point of views. Our preferred methodology is the Malmquist Total Factor Productivity Index (MPI), which allows us to examine five different indices namely, the productivity change (TFPCH), technological change (TECHCH), efficiency change (EFFCH), pure technical efficiency change (PEFFCH) and scale efficiency change (SECH) indices. In specifying the variables input- output, the intermediation approach is chosen, which could be argued to be much in line with the Islamic financial system?s principle. Additionally, to investigate whether the domestic and foreign banks * Bumiputra-Commerce Bank Berhad (BCB). Department of Banking and Finance, Faculty of Business and Accounting, University of Malaya (UM). were drawn from the same population, we have performed a series of parametric and non-parametric tests.