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Business Management DynamicsVol.1, No.4, Oct 2011, pp.33-49

A Comparison on Efficiency of Domestic and Foreign Banks in Malaysia: A DEA ApproachOng Tze San1,LimYee Theng1and TehBoon Heng2

AbstractThis study utilizes non parametric Data Envelopment Analysis (DEA) toanalyze and compare the efficiency of foreign and domestic banks in Malaysia.

The analysis is based on a panel data set of 9 domestic banks and 12 foreignbanks in Malaysia over the period of 2002-2009. Intermediation approach isused to define the inputs and outputs in computerizing the efficiency scores.Surprisingly, the findings are inconsistent with most of the findings of previousstudies where the foreign banks were outperforming their domestic peers in termof efficiency. Conversely, the finding of this study shows that domestic bankshave a higher efficiency level than foreign banks, this imply that domestic banksare relatively more managerially efficient in controlling their costs.The second stage of the empirical results is based on the Tobit model, whichsuggests that the pure technical efficiency (PTE) of banks in Malaysia is mainlyaffect by capital strength, loan quality, expenses and asset size..

Key words:DEA, banks, local,foreign, Malaysia, comparison.

Available onlinewww.bmdynamics.comISSN: 2047-7031

INTRODUCTION

The efficiency of banks in Malaysia is important and should receive greater attention. Theforemost reason is that banks play an important role as financial intermediaries. The banks are the partywho channel funds from those who have excess funds to those who have productive needs for thosefunds. Therefore, their efficiency will indirectly affect the whole countrys economics, operation andwealth. The second reason is that as the evidence proven that banks play an important role in the GlobalCrisis 2008, however, Malaysian capital and debt market are not well developed. Thus, success of banksin term of efficiency has attracted the interest from researchers, investors and policy makers. Lastly, thebanks in Malaysia are facing stronger rivalry due to the globalization and liberalization of the financialsystem. Furthermore, the foreign banks entry is just like a coin has two sides. It either brings harmsor potential benefits to domestic banks, therefore the finding of efficiency of domestic and foreignbanks in Malaysia become important.

BACKGROUND OF STUDYThe Structure of the Malaysian Banking System

The Malaysian banking system can be classified into commercial banking financialinstitutions and non-commercial banking financial institutions. In fact, these two institutions aredifferent in term of the activities that they undergo. Furthermore, the banking system can be classifiedinto three main types; there are commercial banks (domestic and foreign), finance companies and themerchant banks.

The main players in the banking system are commercial banks since they are the largest andmost significant funds providers in the banking system. Besides, commercial banks in Malaysia notonly enjoy the widest scope of permissible activities but also able to engage in a full range of bankingservices. There are total of 23 commercial banks in Malaysia where domestic bank 9 and foreign bank14.

On the other hand, finance companies formed the second largest group of deposit takinginstitutions in Malaysia. Finance companies engage in specializing of consumption credit, comprisingmainly of hire purchase financing, leasing, housing loans, block discounting and secured personalloans. Whereas, merchant banks play an important role in the short-term money market and capitalraising activities.

1Faculty of Economics and Management, University Putra Malaysia, Malaysia. [email protected] of Management, Multimedia University Malaysia
http://www.bmdynamics.com/http://www.bmdynamics.com/http://www.bmdynamics.com/

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Research ObjectivesThe main objectives in this study are as follow:

1. To analysis and compare the efficiency of domestic and foreign banks in Malaysia duringthe period of 2002 to 2009.

2. To identify whether domestic or foreign banks are more efficient during the Global Crisis2008.

3. To examine the determinants of efficiency of banks in Malaysia.Impact of Foreign Bank Entry

Several studies have found that the entry of foreign bank can bring potential benefits in termsof better resource allocation and higher efficiency (Levine, 1996; Walter and Gray, 1983; Goldberg andSaunders, 1981; Gelb and Sagari, 1990). Moreover, the study of Levine (1996) had mentioned thatallow the entry of foreign banks may (i) enhance domestic financial development by promoteimprovement of domestic financial infrastructure and financial policy, (ii) improve a countrys accessto international capital markets, (iii) improve the financial services quality in domestic bank bystimulate bank competition and subsequently encourage the domestic banks implement moreadvance banking skills and technology.

However, the foreign banks entry has certain disadvantages too. According to Stiglitz(1993), the entry of foreign bank can bring impact to domestic banks in term of potentialcosts. The researcher found that domestic banks have to incur more costs in order to compete withforeign banks by applying more advance banking skills and technology. In addition, the results ofClaessens et al (2001) shown that the foreign banks entry has brought certain risks to domestic banksby making the competition more intense and thereby reduce the earnings of domestic banks.

The Comparison of the Efficiency of Domestic and Foreign Banks: Empirical Evidence

The literature on bank efficiency found that foreign banks showed lower efficiency thandomestic banks, especially in developed countries (Hasan et al., 1996; Mahajan et al., 1996; Kraft et al.,2006; Havrylchyk, 2006). While, there are still have certain foreign banks from other countries able tooperate more efficiently than domestic banks in other developed countries (Berger et al., 1999). This

indicates that the empirical findings have been ambiguous and inconclusive.

Determinants of Bank Efficiency

In fact, the choice of variables in bank efficiency studies will significantly affects the researchsresult. The variables that researcher used in this study are specific to the bank specific variable. Thereason behind this is this type of variables is controllable by the banks. Hence, the banks managementis able to alter the banks efficiency level by controlling the variable that has significant relationshipwith the bank efficiency. Researcher decided to use capital strength as a proxy of capitalization, loanquality as a proxy of asset quality, expenses as a proxy of management capability, profitability as aproxy of earning robustness, asset size as a proxy of bank size and liquidity as a proxy of liquidity toidentify the determinants of bank efficiency and its relationship. Each of these independent variableswill be discussed in turn.

Capital strengthCapital is the ratio of book value of equity to total assets (Equity/ TA). The past literatures

have proven that bank efficiency is associated with equity-to-total asset ratio (Kaparakis et al., 1994;Esho, 2001; Chou et al., 2002; Chan and Liu, 2006).

Loan Quality

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In this study, researcher has chosen DEA to measure the efficiency of domestic and foreignbanks in Malaysia. On the other hand, there are two basic models under DEA namely ConstantReturn to Scale (CRS) and BCC model or Variable Returns to Scale (VRS). In this study, researcherassumed the selected banks are operating at VRS as the banks in Malaysia are facing variousconstraints such as governments tight regulations and highcompetitions in the market. Therefore, thebanks are hardly operating at optimal scale. Under VRS assumption, a model can be oriented either by

output-oriented framework or input-oriented framework. In this study, researcher used output-oriented framework as this framework is more suitable for banks in Malaysia that have beencompeting to provide improved services and better incentive to their customer. Since the variablesthat researcher used in this study were the variables that banks management able to control. Thus,efficiency scores that researcher used in this study is Pure Technical Efficiency (PTE) as it relates to thecapability of managers to utilize banks given resource. In other words, it is relates to the managerialability to maximize revenue and minimize costs. To find PTE, technical efficiency relative to a frontierthat exhibits variable returns to scale, the linear programming problem as presented below for eachbank in the sample is solved by using DEAP 2.1 Software.

DEA Model

where, given sample size of K banks,

Okis a mx 1 vector of output produced by bank kikis a nx 1 vector of inputs produced by bank kOis aKx mmatrix of outputsproduced by K banks in the sample Iis a Kx nmatrix of inputs utilized byK banks in the sampleZ is a vector of nx 1 vector of intensity weights used toconstruct the frontier.Source: Rezvanian, et al. (2008).

Tobit Regression Analysis

The efficiency scores computed from early stage is used as dependent variable in the regressionanalysis. The efficiency scores are regressed on a set of independent variables that is hypothesized toexplain the determinant of bank efficiency. The standard Tobit model can be defined as follows forobservation (bank) i:

y*i= xi+ i;yi= y*i, if y*i 0 andyi= 0, otherwise

Where xi and are vectors of regression coefficient and independent variable respectively,while y*iis a latent variable and yiis the DEA efficiency score. The bank-specific variables includedin the regressions are EQUITY/TA, LLP/TL, NIE/TA, ROA, LNTA and LOANS/TA. By using theefficiency scores as dependent variable, the researcher estimates the following regression model:

jt= 0+ 1EQUITY/TAjt+ 2LLP/TLjt+ 3NIE/TAjt + 4ROAjt+ 5LNTAjt+ 6LOANS/TAjtwhere, jt is the pure technical efficiency of the jth bank in period t. EQUITY/TAjt istotal book value of shareholders equity over total assets of bank j in period t; LLP/TLjt istotal loan loss provisions over total loans of bank jin period t; NIE/TAjt is non-interest expenseover total assets of bank j in period t; ROAjt is profit after tax divided by total assets of bank j inperiod t; LNTA is the natural logarithm of total assets of bank j in period t; LOANS/TAjt is totalloans divided by total assets of bankjin period t.Hypotheses

min PTEk

Ok ZO

PTE kik ZIkZi= 1

Z 0

k= 1,...., K

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Hypothesis 1: There is a significant relationship between capital strength and bank efficiencyHypothesis 2: There is a significant relationship between loan quality and bank efficiency.Hypothesis 3: There is a significant relationship between expenses and bank efficiency.Hypothesis 4 : There is a significant relationship between profitability and bank efficiency.Hypothesis 5: There is a significant relationship between asset size and bank efficiency.

Hypothesis 6: There is a significant relationship between liquidity and bank efficiency.

RESULTS AND DISCUSSIONDescriptive Statistics Analysis

Input AnalysisReferring to Figure 1, total deposits of domestic banks showed a significant steady

increase trend from 2002 to 2009. It increased from RM 412315.50 million to RM 964528.10 million.

However, total deposits of foreign banks showed a mixed trend where it increases from2002 to 2003. In 2002 the total deposits was RM 99984.55 million and it increases by 249.86 % toRM349801.42 million in 2003. Whereas, from 2003 to 2004 it showed a decreasing trend, which isdecline to RM 148003.06 million. After 2004, it underwent a continuous increase until 2009. Itincreased from RM148003.06 million to RM 224321.90 million.

Figure 1: Total deposits of domestic and foreign banks in Malaysia from 2002 to 2009

Total(RM'million

1200000.00

1000000.00

400000.00

800000.00

600000.00

200000.00

0.00

2002 2003 2004 2005 2006 2007 2008 2009

Total Deposits

Domestic Bank

Foreign Bank

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Figure 2: Fixed assets of domestic and foreign banks in Malaysia from 2002 to 2009

By referring to Figure 2, the fixed assets of domestic banks showed a mix trend where itdecreases from 2002 to 2005. In 2002 the fixed assets was RM4828.60 million, it decreases almost by 5% to RM4588.80 million in 2005. Then, it underwent a slightly increase in 2006 and after this itunderwent a continuous increase until 2009. It increases from RM4710.50 million to RM 5536.70million. On the other hand, the fixed assets of foreign banks also showed a mix trend where itdecreases from 2002 to 2003. In 2002 the fixed assets was RM 1054.66 million, it decreases to RM 962.19in 2003. After that, it was inclining to RM 1011.85 million in 2005 and followed by a decline in 2006and 2007. Then, it undergone a slightly increase in 2008, however, it decline again in 2009. The Figure1 and 2 revealed the domestic banks showed higher level of total deposits and fixed assets whencompare to foreign banks. This reflected that domestic banks are more preferable by residents inMalaysia and they have been inclined to trust domestic banks more than foreign banks.

Output AnalysisFrom Figure 3, total loans of domestic banksshowed a significant steady increase trend from

2002 to 2008. However, the total loans of domestic banks were declined to RM513010 million in 2009.On the other hand, total loans of foreign banksshowed a steady increase trend from 2002 until 2009.By referring to the Figure 4, the total investments of domestic banks decreased in 2002 to 2003.

However, after 2003, the total investments showed a significant steady increasing trend until 2009.While, total investments of foreign banks showed a mix trend where it increases from 2002 to 2004.Then, it showed a decreasing trend in 2005. After this, the total investments inclined in 2008 and itdeclined in 2009. The Figure 3 and 4 revealed that the domestic banks have higher level of output interm of total loans and total investments when compare to foreign bank. This is due to sufficient funds

Total(RM'million

4000.00

6000.00

5000.00

3000.00

2000.00

1000.00

0.00

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

Fixed Assets

Domestic Bank

Foreign Bank

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from customers deposit, thus, the domestic banks were able to provide loan to customers by using

the deposit.

Figure 3: Total loans of domestic and foreign banks in Malaysia from 2002 to 2009

Total(RM'million

400000.00

700000.00

600000.00

500000.00

300000.00

200000.00

100000.00

0.00

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

Total Loans

Domestic Bank

Foreign Bank

Total(RM'million

300000.00

250000.00

200000.00

150000.00

100000.00

50000.00

0.00

2002 2003 2004 2005 2006 2007 2008 2009

Total Investments

Domestic Bank

Foreign Bank

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Business Management DynamicsVol.1, No.1, July 2011, pp.01-11

Society for Business and Management Dynamics

Figure 4: Total investment of domestic and foreign banks in Malaysia from 2002 to 2009

Efficiency of Domestic Banks

By referring to Figure 5, researcher found that from 2002 to 2009, most of the domestic banksexhibited high level of efficiency, which means that most of the domestic banks able to achieve efficiencyscore equal to 1.00. Moreover, there was no domestic banks exhibited low efficiency from 2002 to 2009.Whereas, in term of mean efficiency, domestic banks in Malaysia are exhibited relatively stable efficiencyscore whereby the efficiency score is always above 90%. Furthermore, the finding shows the average PTEof domestic banks from 2002 to 2009 is 97.81%. This result is consistent and close to Njie (2007) and Sufian

(2004) where the efficiency level of banks in Malaysia is more than 90%. On the other hand, this result isquiet far from the finding of Matthews and Mahadzir (2006) where the average pure technical efficiencyof domestic banks in Malaysia is 76%.

Efficiency of Foreign Banks

By referring to Figure 5, we found that from 2002 to 2009, most of the foreign banks showed highlevel of efficiency. However, at the same time, there also have some foreign banks were exhibited lowefficiency from 2002 to 2009 (except year 2006). Overall the results imply that the pure technical efficiency(PTE) of foreign banks were relatively unstable, which fluctuating from year to year. This study foundthat the average PTE of foreign banks from 2002 to 2009 is 94.92%. Thus, this result was almost close withfinding of Matthews and Mahazir (2006) where the average pure technical efficiency (PTE) of foreignbanks in Malaysia was 0.9507 or 95.07%. In addition, this result is consistent and close to Njie (2007) andSufian (2004) where the efficiency level of banks in Malaysia is more than 90%.

Total(RM'million

400000.00

700000.00

600000.00

500000.00

300000.00

200000.00

100000.00

0.00

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

Total Loans

Domestic Bank

Foreign Bank

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Figure 5: Domestic bank: summary results of efficiency level

Figu

re 6:

Fore

ign

ban

k:

sum

mar

y

resu

lts

of

effic

ienc

yleve

l

Table 5:

Summary statistics of efficiency scores a comparison between domesticand foreign banks in Malaysia from 2002 to 2009

100

90

80

70

60

40

50

30

20

10

0

2002 2003 2004 2005 2006 2007 2008 2009

Years

High

Medium

Low

100

90

80

40

70

60

50

30

20

10

0

2002 2003 2004 2005 2006 2007 2008 2009

Years

High

Medium

Low

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Year

Mean

StandardDeviation

Max Min

DB FB DB FB DB FB DB FB

2002 0.9742 0.9477 0.0494 0.1154 1.0000 1.0000 0.8866 0.6013

2003 1.0000 0.9343 0.0000 0.2061 1.0000 1.0000 1.0000 0.2832

2004 0.9841 0.9532 0.0440 0.1191 1.0000 1.0000 0.8671 0.5897

2005 0.9745 0.9603 0.0515 0.1209 1.0000 1.0000 0.8666 0.5800

2006 0.9883 0.9888 0.0312 0.0316 1.0000 1.0000 0.9052 0.8911

2007 0.9489 0.8717 0.0685 0.2485 1.0000 1.0000 0.8457 0.2755

2008 0.9678 0.9678 0.0417 0.0858 1.0000 1.0000 0.9031 0.7101

2009 0.9868 0.9698 0.0304 0.0690 1.0000 1.0000 0.9071 0.7671

Average 0.9781 0.9492

Note: *DB: Domestic Banks *FB: Foreign BanksFigure 7: The mean efficiency of foreign and domestic banks in Malaysia

from 2002 to 2009

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Comparison of the Efficiency of Domestic and Foreign Banks

This study found that the average pure technical efficiency (PTE) of domestic banks (0.9781 or97.81%) is higher than the average pure technical efficiency (PTE) of foreign banks (0.9492 or 94.92%).

Moreover, if compared both of the from year to year as shown at Table 4.5 and Figure 4.5, researcherfound that the domestic banks had exhibited higher level of efficiency than foreign banks. This reflectedthat there is much room for improvement in term of pure technical efficiency (PTE) for foreign banks.Meaning than, foreign banks in Malaysia are unable to spread their superior managerial skills or best-practice policies and procedures from their home regulators.

In addition, since number of foreign banks is limited by Malaysian banking system, thereforetheir outputs in term of total loans and investments are lesser as compared to domestic banks.Consequently, foreign banks are less efficient than domestic banks.

The result of this study was inconsistent with the findings of Isik and Hassan (2002), Hasan andMarton (2003), Kraft et al. (2006) and Havrylchyk (2006) where the foreign banks were able to operatemore efficient than domestic banks. However, the finding of this study was consistent with Berger et al.(1999) where the domestic banks showed higher level of efficiency but the differences are not statisticallysignificant.

The Efficiency of Domestic and Foreign Banks during the Global Crisis 2008Referring to Figure 5, the efficiency score for both domestic and foreign banks were relatively

high in the year of Global Crisis 2008 and a year after the Global Crisis 2008, which is year 2009. Fordomestic banks, it was 0.9678 or 96.78% in 2008 and 0.9868 or 98.68% in 2009; whereas, for foreign banks,it was also 0.9678 or 96.78% in 2008 and 0.9698 or 96.98% in 2009. This finding seems to imply that theefficiency of banks in Malaysia was not affected by the Global Crisis 2008 as Malaysian banking systemhas a strong foundation. The efforts by Bank Negara Malaysia to structurally transform and strengthenthe banking sector through a massive consolidation exercise after the Asian Financial Crisis 1997 hasimproved the efficiency and preserving stability of Malaysia financial institutions. Referring to Figure4.8, Malaysia Banking sectors has managed itself with strong capital, with an average of core capital ratio(CCR) higher than 10% since 2007. This ratio shows an increasing trend in 2009, with 11.6% for Q1, 12.3%

1.0000

0.9800

0.9600

0.9400

ii

0.9200

0.9000

0.8800

Mean Efficiency

2002 2003 2004 2005 2006 2007 2008 2009

0.8600

0.8400

0.8200

0.8000

Domestic Bank

Foreign Bank

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for Q2 and 12.9% for Q3. Whereas, the risk weight capital ratio (RWCR) recorded an average of 13.4% for2007, 13% for 2008 and 14% for the three quarters of 2009.

Figure 8: Core capital ratio (CCR) and risk weight capital ratio (RWCR)

Source: Bank Negara Malaysia (2009)

Referring to Table 6, in year 2008, the net non-performing loans had maintained stable which atrate less than 3%. Without affected by the deterioration of economic condition, Malaysia banking sectorsremain strong with improvement in the net performing loans from 2007 to 2009. In conclusion, strongbanking sectors performance is a key factor that ensured Malaysias intermediation function remaineduninterrupted and thereby the efficiency of domestic and foreign banks remained unaffected by GlobalCrisis 2008.

Table 6: Non-performing loan from 2007 to 2009

Year 2007 2008 2009

Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Total NPL(RM billion)

26.4 24.1 21.9 20.1 19.6 17.8 16.6 15.8 16.0 15.8 15.9

% fromTotal NetLoan

4.6 4.1 3.5 3.0 3.0 2.7 2.4 2.2 2.2 2.2 2.1

Source: Bank Negara Malaysia, Quarterly Report (2009)

TOBIT REGRESSION ANALYSISHypothesis Testing

The result of regression which focuses on the relationship between bank efficiency and the sixexplanatory variables are showed at Table 7.

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Table 7: Summary of Tobit Regression Output

jt = 0 + 1EQUITY/TAjt + 2LLP/TLjt + 3NIE/TAjt + 4ROAjt+ 5LNTAjt+LOANS/TAjt + it

Variables Coefficient P-Value

EQUITY/ TA -0.002655 0.0003***LLP/ TL -0.011666 0.0000***

NIE/TA 0.045791 0.0008***

ROA 0.006476 0.5355

LNTA -0.037695 0.0502*

LOANS/TA 0.000625 0.2019

R Squared 0.266425

Adjusted R - Squared 0.233318

Notes:

Dependent Variable

1. Banks Efficiency Scores

Independent Variables

1. EQUITY/ TA (Shareholders Equity/ Total Assets) =Capital Strength2. LLP/ TL(Loan Loss Provision/ Total Loans) = Loan Quality3. NIE/ TA(Non-interest Expenses/ Total Assets) = Expenses4. ROA (Return of Assets) = Profitability5. LOGTA (Natural logarithm of Total Assets) = Asset Size6.

LOANS/ TA (Total Loans/ Total Assets) = Liquidity* Significant at the 0.10 level

** Significant at the 0.05 level

** *Significant at the 0.01 level

The finding of this study show that the pure technical efficiency (PTE) is positively correlatedwith liquidity and profitability. However, the result was not significant. On the other hand, capitalstrength, loan quality, expenses and asset size are significant associated with pure technical efficiency(PTE) where the capital strength, loan quality and asset size are negatively correlated with the puretechnical efficiency (PTE), however, the expenses is positively correlated with the pure technicalefficiency (PTE). Thus, this finding seems to suggest that the pure technical efficiency (PTE) of banks in

Malaysia is mainly affected by capital strength, loan quality, expenses and asset size. However, thetheoretical framework that adopted in this study is not a good model as there is only weak 26.64 percentof variation in dependent variable (bank efficiency) was explained by independent variables (capitalstrength, loan quality, expenses, profitability, asset size and liquidity).

CONCLUSIONThis study found out that the average pure technical efficiency (PTE) of domestic banks (0.9781 or

97.81%) is higher than the average pure technical efficiency (PTE) of foreign banks (0.9492 or 94.92%).Moreover, if compared the year to year, researcher found that the domestic banks exhibited higher levelof efficiency than foreign banks. This reflected that domestic banks are relatively more managerially

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efficient in controlling their costs as home field advantage hypothesis can disadvantage to foreign banksin terms of higher costs. Meaning that, the foreign banks will incur higher costs compare to domesticbanks when providing the same financial services to customers. In addition, foreign banks face theproblem of differences in regulatory, language, culture, currency or bias against foreign banks andsometimes the home regulators of foreign banks might face difficulty in monitoring institutions from adistance. Furthermore, both banks showed relatively high efficiency in the year of Global Crisis 2008 and

a year after the Global Crisis 2008, which was year 2009. This finding seems to imply that the puretechnical efficiency (PTE) of banks in Malaysia was not affected by the Global Crisis 2008 as Malaysianbanking system has healthy volume of international reserves, strong capitalization and ample liquidity.The finding of this study also show that the pure technical efficiency (PTE) is positively correlated withliquidity and profitability. However, the result was not significant. On the other hand, capital strength,loan quality, expenses and asset size are significant associated with pure technical efficiency (PTE) wherethe capital strength, loan quality and asset size are negatively correlated with the pure technical efficiency(PTE), however, the expenses is positively correlated with the pure technical efficiency (PTE). Thus, thisfinding seems to suggest that the pure technical efficiency (PTE) of banks in Malaysia is mainly affectedby capital strength, loan quality, expenses and asset size. However, the theoretical framework thatadopted in this study is not a good model as there is only weak 26.64 percent of variation in dependentvariable (bank efficiency) was explained by independent variables (capital strength, loan quality,

expenses, profitability, asset size and liquidity).

SUGGESTION FOR FUTURE STUDYFirstly, it is recommended to include technical efficiency, scale efficiency and allocative efficiency

in future study. Furthermore, the future research may include finance companies, merchant banks andIslamic banks in order to obtain a more accurate situation and precise results that can represent the wholeMalaysian finance industry. In addition, future researchers are encouraged to apply different analyticalmodels, such as parametric, Stochastic Frontier Approach (SFA) in their research. By using the differentmodels, they can justify whether the efficiency scores generated by different frontier models areconsistent with the DEA that is used or not. Besides, future researchers may choose more banks inputsand outputs. This could help minimize sampling error by increasing possible input and output variablesand be able to generate different results. Furthermore, future research can be extended in the way thatemploying the Malmquist Productivity Index (MPI) to investigate the productivity of banks over time

with changing of technology. On the other hand, future researchers may select other variables that differfrom this study. In this study, the researcher used bank specific variables as independent variable todetermine the determinant of bank efficiency. Future researcher may use macro environment variablessuch as regulatory, bank type, geographical region and ownership. Finally, future study may includelonger sampling periods to make sure that the result for the determinant of bank efficiency is moreaccurate and reliable.

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