International Journal of Commerce and Management

On the efficiency of the Malaysian banking sector: a risk-return perspective

Fadzlan Sufian Razali Haron
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Fadzlan Sufian Razali Haron, (2009),"On the efficiency of the Malaysian banking sector: a risk-return
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IJCOMA
19,3 On the efficiency
of the Malaysian banking sector:
a risk-return perspective
222
Fadzlan Sufian
Khazanah Research and Investment Strategy, Khazanah Nasional Berhad,
Kuala Lumpur, Malaysia and
Department of Economics, Faculty of Economics and Management,
Universiti Putra Malaysia, Selangor, Malaysia, and
Razali Haron
Department of Business Administration,
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Kulliyyah of Economics and Management Sciences,

International Islamic University Malaysia, Kuala Lumpur, Malaysia

Abstract
Purpose The purpose of this paper is to examine the efficiency of the Malaysian banking sector.
The technique used by Oliveira and Tabak is extended by employing market data as input and output
variables to individual bank stocks, which are listed on the Kuala Lumpur Stock Exchange (KLSE). By
doing this, the paper aims to broaden the scope of the existing studies by employing individual bank
market data to measure their efficiency levels.
Design/methodology/approach The paper utilizes the non-parametric data envelopment
analysis methodology to measure the efficiency of banks which are listed on the KLSE. While
previous bank efficiency studies have used balance sheet and income statements data, this paper
uses individual banks market data as the input and output variables to construct the efficiency
frontier.
Findings The main conclusion of this paper is that the most efficient bank is also highly ranked in
terms of returns with relatively low standard deviation and beta. The results also suggest that all the
banks which have managed to appear on the efficiency frontier are mainly based on the relatively
higher mean returns rather than lower standard deviations and/or beta.
Research limitations/implications The approach used in this paper could also be used to other
economic sectors, as well as from a multiple countries perspective as this approach allows the
comparison of different countries, which have different accounting rules and are not comparable
by using standard models. The approach could also be extended to incorporate other input(s) and/or
output(s) which could further add to the robustness of the results.
Originality/value The contribution of the paper consists of proposing a new approach to the
measurement of bank efficiency.
Keywords Banking, Share prices, Data analysis, Malaysia
Paper type Research paper

International Journal of Commerce
and Management
Vol. 19 No. 3, 2009
pp. 222-232
q Emerald Group Publishing Limited
1056-9219
DOI 10.1108/10569210910987994
All findings, interpretations, and conclusions are solely of the authors opinion and do not
necessarily represents the views of the institutions.
The authors would like to thank the Editor, Abbas J. Ali, and an anonymous referee for many
helpful comments and suggestions that has considerably improved the earlier version of the
paper. The usual caveats apply.
 1. Introduction Efficiency
Over the last years, studies examining the efficiency of banks with parametric and/or of the Malaysian
non-parametric frontier techniques are abound in the literature. While the majority of the
early studies focus on the USA (Berger and Humphrey, 1991; Berger, 1993; Miller and banking sector
Noulas, 1996), more recent studies examine several other countries such as Australia
(Sathye, 2001), India (Ataullah and Le, 2006), Hong Kong (Drake et al., 2006), and
Sufian (2007). Apart from focusing on various countries, these studies also examine 223
several other issues of bank efficiency, i.e. efficiency of foreign and domestic banks,
impact of risk on bank efficiency, off-balance sheet activities on bank efficiency, etc.
However, only a few of these studies have examined the relationship between share
performance and bank efficiency (Beccalli et al., 2006). These include Adenso-Diaz and
Gascon (1997) in Spain, Chu and Lim (1998) and Sufian and Majid (2006a) in Singapore,
Eisenbeis et al. (1999) in the USA, Beccalli et al. (2006) in the principal EU banking
sectors (i.e. France, Germany, Italy, Spain, and the UK), Sufian and Majid (2006b) in
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Malaysia, and Kirkwood and Nahm (2006) in Australia. This is surprising since several
studies have examined the relationship between share price changes and traditional
accounting performance measures that reflect earnings and cash flows and many of
them tend to support that earnings reflect the information in share prices[1].
Nonetheless, as mentioned in Halkos and Salamouris (2004), the use of financial
ratios to measure bank performance has recently been criticized. Berger and Humphrey
(1997) and Bauer et al. (1998) mentioned that efficient frontier approaches seem to
be superior compared to the use of traditional financial ratios from accounting
statements such as return on assets or the cost/revenue ratio in terms of measuring
performance. Berger and Humphrey (1997) point out that the frontier approaches offer
an overall objective numerical score and ranking and an efficiency proxy together
with the economic optimization mechanism. Furthermore, in relation to share
performance, the empirical findings by Beccalli et al. (2006) not only provide support to
the argument that better operating efficiency is reflected in better stock performance,
but they also find evidence that efficiency measures appear to have high explanatory
power than traditional accounting ratios.
The purpose of the present study is to provide additional evidence from the
Malaysian banking sector. Although a recent study by Sufian and Majid (2006b)
investigate the efficiency of Malaysian banks and its share performance in the
marketplace, in the present paper, we extend the technique used by Oliveira and
Tabak (2005) by employing market data as input and output variables to individual
banks stocks that are listed on the Kuala Lumpur Stock Exchange (KLSE). By doing
this, we intend to broaden the scope of the existing studies by employing individual
bank market data to measure their efficiency levels.
The rest of the paper is structured as follows: Section 2 presents the review of the
related studies. Section 3 discusses the data and methodology. Section 4 discusses
the empirical results and Section 5 concludes the study.

2. Review of the literature

Efficiency studies applied to banking sectors abound in the literature. However, only
a few studies examine the relationship between share performance and bank efficiency
(Beccalli et al., 2006). Using data envelopment analysis (DEA) with three inputs and two
outputs, Chu and Lim (1998) evaluated the relative cost and profit efficiency of a panel
 IJCOMA of six Singapore-listed banks during the period 1992-1996. They found that during
19,3 the period the six Singapore-listed banks have exhibited higher overall efficiency of
95.3 percent compared to profit efficiency of 82.6 percent. They also found that large
Singapore banks have reported higher efficiency of 99.0 percent compared to
92.0 percent for the small banks. They suggest that scale inefficiency dominates pure
technical inefficiency during the period of study. They found that percentage change in
224 the price of bank shares reflect percentage change in profit rather than cost efficiency.
By using the DEA besides the parametric model stochastic frontier approach (SFA),
Beccalli et al. (2006) estimates efficiency measures of the banking cost to a sample of
European banks (France, Germany, Italy, Spain, and the UK) in 1999 and 2000. When they
defined the parameters to be used in the model, the authors chose the focus of
intermediation approach by using deposits, loans, and securities as outputs, and labor and
capital as inputs. The authors made the regression of the annual scores of efficiency in
relation to the respective performances in the stock market. The results suggest that
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changes in the prices of banks stocks mirror changes in cost efficiency, especially the ones
derived from the DEA. This trend is not that clear when using the SFA model.
Kirkwood and Nahm (2006) used DEA to evaluate cost efficiency of Australian
banks in producing banking services and profit between 1995 and 2002. Empirical
findings indicate that major banks have improved their efficiency in producing
banking services and profit, while the regional banks have experienced little change
in the efficiency of producing banking services, and a decline in the efficiency of
producing profit. They further relate the changes in efficiency to stock returns
and found that changes in bank efficiency are reflected in stock returns.
Sufian and Majid (2006a) employed the non-parametric frontier approach, DEA to
three-year event window to detect for any efficiency gains (loss) as result of the mergers
and acquisitions among the domestic-incorporated Singapore banking groups. Their
results suggest that the merger has resulted in higher mean overall efficiency of Singapore
banks post-merger relative to pre-merger. The results also support the hypothesis that the
acquiring banks efficiency improved (deteriorates) post-merger resulting from the merger
with a more (less) efficient bank. They have further established the relationship between
cost efficiency and share price performance by employing panel regression analysis. The
evidence seems to indicate that the excess market returns tend to reflect the stock
performance rather than changes in cost efficiency.
Sufian and Majid (2006b) empirically investigates the X- and P-efficiencies of
Malaysian banks that are listed on the KLSE during 2002-2003 by applying the
non-parametric DEA model. They found that the X-efficiency of Malaysian banks was
on average significantly higher compared to the P-efficiency. They also suggest that
the large banking groups on average were more X-efficient whereas the smaller
banking groups were found to be more P-efficient. They suggest that the stock prices
of Malaysian banks react more towards the improvements in P-efficiency rather than
the improvements in X-efficiency.
Oliveira and Tabak (2005) presents a novel approach to measure and compare the
efficiency of the banking system in 41 developed and developing countries by using
the non-parametric DEA methodology. Differently from most studies that use
accounting data for measuring efficiency, in order to build a new measure of efficiency,
they employed market data for measuring returns and risk (calculated in different
ways). This approach allows the comparison of different countries, which have different
 accounting rules and are not comparable by using standard models. The main results Efficiency
suggest a downward trend in the average efficiency levels of developed countries and a of the Malaysian
slight upward trend in the efficiency levels of emerging market countries during the
period. According to their study, efficiency tends to level off emerging and developed banking sector
countries. It may be partially explained by the increasing globalization and integration
processes that markets have been going through in the last years.
225
3. Methodology and data
A non-parametric DEA is employed with variable return to scale (VRS) assumption to
measure input-oriented technical efficiency (TE) of the Malaysian banks. DEA
involves constructing a non-parametric production frontier based on the actual
input-output observations in the sample relative to which efficiency of each bank in the
sample is measured (Coelli, 1996). Let us give a short description of the DEA[2].
Assume that there is data on K inputs and M outputs for each N bank. For ith bank,
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these are represented by the vectors xi and yi, respectively. Let us call the K N input
matrix X and the M N output matrix Y. To measure the efficiency for each bank
we calculate a ratio of all inputs, such as (u0 yi/v0 xi) where u is an M 1 vector of output
weights and v is a K 1 vector of input weights. To select optimal weights, we specify
the following mathematical programming problem:
min
u;v
u0 yi =v0 xi

u0 yi =v0 xi 1; j 1; 2; . . . ; N ; 1
u; v $ 0

The above formulation has a problem of infinite solutions and therefore we impose the
constraint v0 xi 1, which leads to:
min
m;w
m0 yi

w0 xi 1
2
m0 yi 2 w0 xj # 0; j 1; 2; . . . ; N ;
m; w $ 0
where we change notation from u and v to m and w, respectively, in order to reflect
transformations. Using the duality in linear programming, an equivalent envelopment
form of this problem can be derived:
min u
u;l

yi Y l $ 0
3
uxi 2 Xl $ 0
l$0
where u is a scalar representing the value of the efficiency score for the ith
decision-making unit which will range between 0 and 1. l is a vector of N 1 constants.
The linear programming has to be solved N times, once for each decision-making unit in
 IJCOMA the sample. In order to calculate efficiency under the assumption of VRS, the convexity
constraint (N10 l 1) will be added to ensure that an inefficient firm is only compared
19,3 against firms of similar size, and therefore provides the basis for measuring economies
of scale within the DEA concept. The convexity constraint determines how closely the
production frontier envelops the observed input-output combinations and is not
imposed in the constant returns to scale case.
226
3.1 Evaluation criteria and the choice of inputs and outputs
Unlike applications of DEA in the production fields, where inputs and outputs are
tangible elements, the choice of inputs and outputs is not straightforward when dealing
with stock performance. Nevertheless, in a multiple criteria decision-making framework,
it is logical to consider inputs as criteria that investors want to minimize, while outputs
as those they want to maximize. Hence, if investors seek to evaluate the stock
performance, i.e. returns to risks, the inputs can be several measures of risk (standard
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deviation, kurtosis, b, various measures of value-at-risk) over one (or several) horizon (s),
while the outputs can be composed of several measures of returns (mean, skewness)
over one (or several) horizon (s).
Unlike previous research which examines the efficiency of banks and their share
performance in the marketplace and as an innovation, the paper will measure the
efficiency of banks by incorporating the use of market data such as risk and
profitability in the stock market as input and output in the function, respectively.
We will measure and compare bank efficiency, where the activities of the banks will be
considered as functions of transforming risk into profitability. As profitability, the
appreciation of each banks stock will be used.
As there is not a universal definition of risk, particularly market risk, among the
existing approaches, the degree of dispersion of frequency distribution, where the
variance and the standard deviation are the most commonly used measures of risk.
However, the theory of capital asset pricing model (CAPM) defines the beta (b) of a
security as the most appropriate measure of risk, and not the standard deviation. Using
the CAPM, it is possible to measure the risk of a security by its b, which represents the
trend of a security to vary together with any parameter, usually the market parameter.
The b is obtained through the calculation of the covariance of the profitability of a
security in relation to a market portfolio or through a predetermined parameter divided
by the variance of the profitability of this portfolio or of this parameter. Therefore, the
expected profitability of a security is positively related to its risk, because the investors
will only assume additional risks if they receive an additional compensation.
In this paper, we will use, as input, both the market risk measured by the standard
deviation of the annual profitability of the bank stocks and the market risk translated
by the bs among the bank stocks in relation to the Kuala Lumpur Composite Index.
And as output, the profitability of each bank stocks will be used. Efficiency is
measured as the ratio of the output (profitability) by a combination of risks perceived
by each bank. The production function can be written as:
f b; s R 4
where b is the beta of the annual return of each bank stocks; s is the standard deviation of
the annual return of each bank stocks; R is the annual profitability of the stocks of each
bank calculated as annual stock returns, which are calculated for each bank by adding
daily returns. This measure is believed to be a better measure than calculating a point
 increase with data from the first and the last day of the period under investigation. Daily Efficiency
returns have smaller standard deviations than do annual and monthly returns[3]. of the Malaysian
For the empirical analysis, all Malaysian banks that are listed on the KLSE will be
incorporated in the study. The stocks profitability is available through the package banking sector
Datastream released by the company Thomson Financial. The series of stocks are used
as variables in the calculation of the b. The b, together with the standard deviation of
the evolution of stocks of each bank, served as inputs in the DEA model. The main idea 227
here is that investors can choose their level of desired risk and will face a rate of return,
which is proportional (to some extent) to this level of risk. Banks that perceive a higher
rate of return adjusted to these different risk measures are said to be efficient.

3.2 Input- or output-oriented versions?

In general, when inputs and outputs are semi-positive, the choice between the input
oriented version and the output-oriented version can be simply made at users discretion
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following their preferences. Note that the input-oriented version (output-oriented

version) assumes that outputs (inputs) are fixed only inputs (outputs) can be adjusted.
This assumption conditions the reference stock on the efficient frontier to which is
compared the target stock and thus determines the distance between the former and the
latter, this distance measuring the efficiency level of the latter. Nevertheless, it is also
interesting to note that most studies, which have applied DEA to evaluate stock
performance, adopted the input-oriented version of the DEA model. This popularity is
undoubtedly due to the fact that this mathematical form shares the same logic as
Markowitzs efficient frontier construction that is to minimize the risks (inputs) for a
defined level of returns (outputs).

4. Empirical findings
As mentioned earlier, among the fundamental of the DEA model is that the function
determines relative efficiencies, that is, the institutions in the sample that present the
highest efficiency will serve as a parameter for the others and they will be considered as
efficient. Table I shows the empirical findings, with the absolute weights (u, v) and
virtual weights (uy, vx) obtained under an input oriented setting with daily mean share
return as output, while standard deviation and b are used as inputs. From Table I, it is
observed that the highest share return was recorded during the year 2001 (104.5 percent),
followed by year 2005 (100.5 percent), and year 2002 (99.3 percent), while the lowest
mean share return was recorded during the years 2006, 2004, and 2003 with average
return of 8.6, 9.6, and 12.6 percent, respectively. It is also interesting to note that the
Malaysian banking sector has exhibited the highest and lowest mean return during the
post-crisis years. Likewise, the standard deviation was highest in 1998 while the lowest
was in 2006. The b was the highest in year 2003 and it was lowest during the year 2000.
It is also apparent that the Malaysian banking sector has exhibited the lowest mean
TE of 54.9 percent in 1997 which was the crisis hit year, before gradually improving to
60.3, 62.5, and 81.2 percent during the years 1998-2000. It is clear that the Malaysian
banking sector has posted lower mean TE of 71.3 percent during the year 2001 before
improving to 83.4 percent in year 2002. A plausible reason could be due to the economic
growth cycle in which the domestic economy has exhibited marginal growth of 0.3
percent in year 2001 before recovering to record 4.1 percent economic growth during
 IJCOMA
TE Rank TE Return Rank ret. SD b
19,3
AFF
1997 0.330 6 0.456 7 4.568 1.515
1998 0.565 5 0.404 2 7.053 1.469
1999 0.439 7 0.215 7 3.015 0.987
228 2000 0.673 7 0.706 8 2.052 0.745
2001 0.493 6 0.998 7 2.560 1.111
2002 0.652 7 0.982 5 2.168 1.154
2003 0.108 8 0.032 8 2.213 2.474
2004 1.000 1 0.205 1 2.456 2.551
2005 0.630 8 0.983 5 1.521 1.319
2006 0.701 4 0.083 4 1.044 1.750
Mean 0.559 0.506 2.865 1.508
Overall rank 7 8 3 3
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BCB
1997 0.324 7 0.518 5 5.291 1.811
1998 0.569 4 0.399 3 6.905 1.536
1999 1.000 1 0.507 1 3.035 1.229
2000 0.762 6 0.964 4 2.338 1.054
2001 0.442 7 1.005 6 2.877 1.430
2002 0.660 6 0.968 6 1.949 1.476
2003 0.393 6 0.106 6 1.760 2.819
2004 0.452 6 0.068 6 1.802 2.703
2005 0.795 4 1.082 2 1.328 1.095
2006 0.798 2 0.129 2 1.426 2.389
Mean 0.620 0.575 2.871 1.754
Overall rank 5 2 2 2
EON
1997 0.274 8 0.347 8 4.190 1.01
1998 1.000 1 0.663 1 6.534 0.752
1999 0.146 8 0.036 8 1.613 0.264
2000 0.836 5 0.920 5 2.329 0.582
2001 1.000 1 1.121 1 1.419 0.279
2002 0.952 4 1.044 3 1.736 0.599
2003 1.000 1 0.220 1 1.566 1.864
2004 0.893 4 0.108 3 1.449 1.736
2005 0.684 6 0.953 8 1.360 1.256
2006 0.720 3 0.113 3 1.385 2.088
Mean 0.751 0.553 2.358 1.043
Overall rank 3 3 4 7
HLB
1997 0.621 4 0.579 4 3.086 0.949
1998 0.18 8 0.087 8 4.753 0.873
1999 0.681 3 0.369 3 3.253 1.293
2000 0.867 3 1.06 1 2.431 0.823
2001 0.972 3 1.057 3 1.376 0.530
2002 0.980 3 1.094 1 1.591 0.878
2003 0.309 7 0.066 7 1.426 2.073
Table I. 2004 0.263 8 0.031 8 1.411 1.881
The ranking of banks 2005 0.773 5 0.975 7 1.23 1.153
according to TE and 2006 0.313 7 0.038 7 1.07 1.757
stock price returns (continued)
 TE Rank TE Return Rank ret. SD b Efficiency
of the Malaysian
Mean 0.596 0.536 2.163 1.221
Overall rank 6 5 5 5 banking sector
MBB
1997 0.699 3 0.707 3 3.348 1.168
1998 0.471 6 0.227 6 4.752 1.093
1999 0.668 4 0.239 5 2.141 0.894
229
2000 1 1 1.005 2 1.798 0.904
2001 0.623 5 0.989 8 2.01 1.178
2002 0.95 5 0.965 7 1.349 1.081
2003 0.592 4 0.110 5 1.212 1.879
2004 0.76 5 0.086 5 1.355 2.21
2005 0.805 3 0.984 4 1.193 1.619
2006 0.252 8 0.028 8 0.981 1.968
Mean 0.682 0.534 2.014 1.399
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Overall rank 4 6 6 4
PBB
1997 0.768 2 0.726 2 3.129 1.019
1998 0.647 3 0.286 5 4.356 0.871
1999 0.591 5 0.22 6 2.244 0.865
2000 0.866 4 0.968 3 2.157 0.829
2001 0.806 4 1.053 4 1.653 0.644
2002 1.000 1 1.058 2 1.405 0.989
2003 1.000 1 0.178 2 1.162 1.797
2004 0.973 3 0.094 4 1.158 1.862
2005 1 1 0.979 6 0.955 0.677
2006 0.66 5 0.069 5 0.922 1.884
Mean 0.831 0.563 1.914 1.144
Overall rank 2 1 8 6
RHB
1997 0.377 6 0.516 6 4.525 1.602
1998 0.392 7 0.301 4 7.570 1.595
1999 0.475 6 0.320 4 4.037 1.713
2000 0.488 8 0.824 6 3.140 1.448
2001 0.368 8 1.045 5 3.597 2.034
2002 0.481 8 0.848 8 2.408 1.550
2003 0.508 5 0.167 3 2.280 2.959
2004 0.426 7 0.059 7 1.661 2.393
2005 0.647 7 0.996 3 1.502 1.748
2006 1.000 1 0.181 1 1.597 2.214
Mean 0.516 0.526 3.232 1.926
Overall rank 8 7 1 1
SBB
1997 1.000 1 0.772 1 2.554 0.018
1998 1.000 1 0.113 7 3.865 0.092
1999 1.000 1 0.382 2 2.661 0.027
2000 1.000 1 0.725 7 1.810 0.073
2001 1.000 1 1.097 2 2.204 0.096
2002 1.000 1 0.989 4 1.772 0.228
2003 1.000 1 0.129 4 1.240 0.996
2004 1.000 1 0.114 2 1.442 0.901
(continued) Table I.
 IJCOMA TE Rank TE Return Rank ret. SD b
19,3
2005 1.000 1 1.087 1 1.408 0.029
2006 0.622 6 0.046 6 0.652 0.94
Mean 0.962 0.545 1.961 0.34
Overall rank 1 4 7 8
Return Rank ret. SD Rank SD b Rank b TE Rank TE
230 All banks
1997 0.578 5 3.836 2 1.137 6 0.549 10
1998 0.310 6 5.723 1 1.035 4 0.603 9
1999 0.286 7 2.750 3 0.909 9 0.625 7
2000 0.898 4 2.257 4 0.807 10 0.812 2
2001 1.045 1 2.212 5 0.913 8 0.713 5
2002 0.993 3 1.797 6 0.994 7 0.834 1
2003 0.126 8 1.607 7 2.106 1 0.614 8
2004 0.096 9 1.592 8 2.029 2 0.721 4
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2005 1.005 2 1.312 9 1.112 5 0.792 3

2006 0.086 10 1.135 10 1.874 3 0.633 6
Mean 0.542 2.422 1.292 0.690
Overall rank
Notes: rank TE, ranking of banks in terms of TE; return is stock price return; rank ret., ranking
according to stock price returns; SD, standard deviation; rank SD, ranking of standard deviation
Table I. according to years; b, stock price b; rank b, ranking of b according to years

the year 2002. It is also interesting to note that the Malaysian banking sectors mean
TE has been on a declining trend since the year 2004.
We next turn our discussions on the individual bank results. It is observed from
Table I that Southern Bank Berhad (SBB) which exhibited average TE of 96.2 percent
presents the most efficient bank during the period of study, followed by Public Bank
Berhad (PBB) with a TE of 83.1 percent while EON Bank Berhad (EON) which exhibited
a mean TE of 75.1 percent ranked third. In contrast, Rashid Hussain Bank Berhad (RHB),
Affin Bank Berhad (AFF), and Hong Leong Bank Berhad (HLB) were found to be the
least efficient banks with mean TE of 51.6, 55.9 and 59.6 percent, respectively, during the
period of study. The results imply that for instance in the case of RHB (the least efficient
bank), given the level of risk that investors are taking, they should expect to earn
48.4 percent more returns. In other words, during the period of study, ceteris paribus,
given the level of risk that they are taking, the shareholders of RHB were under
compensated by 48.4 percent. In terms of returns, it is evident that Bumiputra
Commerce Bank Berhad (BCB) ranked first with a mean return of 57.5 percent over the
period of study, followed by PBB (56.3 percent), and EON (55.3 percent). On the contrary,
AFF, RHB, and Maybank Berhad (MBB) generated the lowest returns during the period
with a mean return of 50.6, 52.6, and 53.4 percent, respectively.
By looking at Table I, the DEA results suggest that SBB dominated the efficiency
frontier by appearing as the most efficient bank in all years except for the year
2006. This could be well explained by the fairly high mean returns and small
standard deviation and b during all years. It is also interesting to note that with the
exception of HLB, all other banks have appeared at least once on the efficiency frontier,
i.e. EON (1998, 2001, and 2003), PBB (2002, 2003, and 2005), AFF (2004), BCB (1999),
MBB (2000), and RHB (2006). From Table I, it is also clear that all the other stocks have
 managed to appear on the efficiency frontier were mainly based on the relatively Efficiency
higher mean returns compared to lower standard deviations and/or b. of the Malaysian
5. Conclusions
banking sector
Previous studies have documented that DEA is a powerful tool to solve for decision-making
problems with multiple criteria. The contribution of the paper consists in proposing a new
approach to the measurement of bank efficiency. While previous bank efficiency studies 231
have used balance sheet and income statements data, this paper uses individual banks
market data as the input and output variables to construct the efficiency frontier.
The main conclusion of this paper is that the most efficient bank is also highly
ranked in terns of returns with relatively low standard deviation and b. The results
also suggest that all the banks which have managed to appear on the efficiency frontier
are mainly based on the relatively higher mean returns compared to lower standard
deviations and/or b.
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The approach used in this paper could also be used to the other economic sectors, as
well as from a multiple countries perspective as this approach allows the comparison of
different countries, which have different accounting rules and are not comparable by
using standard models. The approach could also be extended to incorporate other
input(s) and/or output(s) which could further add to the robustness of the results.

Notes
1. See Kothari (2001) for a very comprehensive review of the literature.
2. Good reference books on efficiency measures are Avkiran (2002), Cooper et al. (2000) and
Thanassoulis (2001).
3. The mean standard deviation of monthly returns for randomly selected securities is about
7.8 percent, while the corresponding mean standard deviation of daily returns will be
approximately 1.8 percent if daily returns are serially independent (Fama, 1976, p. 123).

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Corresponding author
Fadzlan Sufian can be contacted at: fadzlan.sufian@khazanah.com.my; fsufian@gmail.com

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