Cost Efficiency of Malaysian Banks during Financial Liberalisation: A Stochastic Frontier Analysis of the Financial Sector Master Plan (2001-2010)

Abstract

This study examines the cost efficiency of Malaysian banks over the decade of financial liberalisation under the Financial Sector Master Plan (FSMP) from 2000 to 2011. Using stochastic frontier analysis (SFA) with a translog cost function, the study evaluates 354 bank-year observations encompassing 32 to 39 institutions operating in Malaysia. The analysis incorporates input prices, output quantities, and environmental factors such as ownership, bank size, liquidity, and the phases of deregulation to capture the dynamic effects of structural reform and global financial turbulence. The results reveal that average cost efficiency declined from 87.6% in 2000 to 71.8% in 2011, with an overall mean of 76.5%, indicating transitional inefficiencies during the liberalisation process. Cost efficiency was negatively influenced by large-bank size, foreign ownership, Islamic specialisation, and the 2008–2010 global financial crisis; while technological progress contributed to modest recovery toward the end of the period. The findings suggest that financial liberalisation enhances long-term competitiveness but imposes short-term cost burdens as banks restructure, integrate technology, and adapt to regulatory change. Concurrently, the results could serve as a vital reference for upcoming policy.