Specialization and other determinants of non-commercial

bank financial institutions’ profitability Empirical evidence from Malaysia

Authors: Fadzlan Sufian, Suarddy Parman.

Prepared by:

Boughezala Hamad Hocine 802042 & Akhmedov Davran 803837

Prepared for:

Prof. Shahriza Bt Osman

Journal: Studies in Economics and Finance Vol. 26 No.2, 2009

pp. 113-128

Data and methodologyData and methodology

ContentsContents

IntroductionIntroduction

Overview of the Malaysia financial systemOverview of the Malaysia financial system

11

22

33

44

55

ResultsResults

Empirical Finding Empirical Finding

66 ConclusionConclusion

04/12/23 2UUM 2010

Purpose of the study: to provide empirical evidence on the factors that influence non-commercial bank financial institutions (NCBFIs) profitability in a

developing economy, and attempt to investigate the performance of financial institutions in Malaysia are

relatively scarce .

Keywords: banks, financial institution, profit, Malaysia

IntroductionIntroduction

04/12/23 3UUM 2010

Banking system(the largest component,

accounting for approximately 70% of

total assets of financial system)

Non-bank financial

intermediaries

Malaysian financial system

Overview of the Malaysian financial systemOverview of the Malaysian financial system

04/12/23 4UUM 2010

Banking systemBanking system

Commercial bank

Finance

companies

Merchant

banks

They are the largest and most significant

providers of funds in the banking system;

The second largest group of deposit taking institutions in Malaysia;

The third largest , it’s merged in Malaysia banking scene in 1970.

Commercial banks

Finance

companies Merchant

banks

The banking system can be divided into three main groups

04/12/23 5UUM 2010

Commercial banks Commercial banks

04/12/23 6UUM 2010

Finance companiesFinance companies

04/12/23 7UUM 2010

Merchant banksMerchant banks

04/12/23 8UUM 2010

Assets of the Banking system: 1960-2004Assets of the Banking system: 1960-2004

04/12/23 9UUM 2010

M.B

F.C

C.B

RM 42,691 million (0.17% of GDP)

RM 68421.1 million (0.27% of GDP)

RM 761,254.8 million(3.05% of GDP)

F.C+ M.B = 22,8% of the banking system

04/12/23 10UUM 2010

Assets of the Banking system: 2004.

Data and methodologyData and methodology

04/12/23 11UUM 2010

Econometric specificationEconometric specificationRelationship between NCBFI profitability and the NCBFIs specific and macroeconomic determinants. Linear regression model:

where P jt is the profitability of NCBFI j at time t; b1, b2, and b3 represent the coefficients of the explanatory variables to be estimated (grouped into NCBFI-specific, macroeconomic determinants, and specialization, respectively), and 1jt is the disturbance term, with vj capturing the unobserved NBCFI-specific effect and u jt is the idiosyncratic error.

04/12/23 12UUM 2010

Summary of parametric and non-parametric tests on equality of means and equality of population

Summary of parametric and non-parametric tests on equality of means and equality of population

04/12/23 13UUM 2010

VariablesVariables

• ROA= return of total assets • LOANS/TA= total loans divided by total assets• LNTA = log of total assets• NII/TA= non-interest income divided by total assets• NIE/TA = total overhead expenses divided by total

assets• EQASS = and book value of stockholders’ equity as

a fraction of total assets

04/12/23 14UUM 2010

ResultsResults• The model performs reasonably well in at least two respects:

1. Results for most variables remain stable across the various regressions tested;

2. The R²s are reasonably high ranging from 86 to 89%. In most cases the explanatory variables have the expected signs.

• LOANS/TA reveals negative relationship with Malaysian NCBFIs profitability although is not statistically significant at any conventional levels.

• LNTA exhibits (+)ve coefficient and is statistically significant at the 5% level implying that the larger NCBFIs tend to be more profitable.

• LLP/TL shows a (-)ve relationship with bank profitability and is statistically significant at the 1% level, indicating that NCBFIs with higher proportion of riskier loans tend to exhibit lower profitability levels.

04/12/23 15UUM 2010

Empirical findingsEmpirical findings

04/12/23 16UUM 2010

Empirical findingsEmpirical findings

04/12/23 17UUM 2010

Conclusion Conclusion

• Malaysian financial sector depends on its efficiency, profitability, and competitiveness. Further, in view of the increasing competition resulting from the more liberalized banking sector

The findings of this study could have provided useful insights to the policymakers, industry leaders, as well as bank managers with regard to attaining optimal utilization of capacities, improvement in managerial expertise, efficient allocation of scarce resources, and most productive scale of operation of the Malaysian NCBFIs industry.

04/12/23 18UUM 2010

For your attention