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Bank Efficiency and Non-Performing Loans: Evidence from Malaysia and Singapore

Author

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  • Mohd Zaini Abd Karim
  • Sok-Gee Chan
  • Sallahudin Hassan

Abstract

The objective of this paper is to investigate the relationship between non-performing loans and bank efficiency in Malaysia and Singapore. To achieve the objective, cost efficiency was estimated using the stochastic cost frontier approach assuming normal-gamma efficiency distribution model proposed by Greene (1990). The cost efficiency scores were then used in the second stage Tobit simultaneous equation regression to determine the effect of non-performing loans on bank efficiency. The results indicate that there is no significant difference in cost efficiency between banks in Singapore and Malaysia although banks in Singapore exhibit a higher average cost efficiency score. The Tobit simultaneous equation regression results clearly indicate that higher non-performing loan reduces cost efficiency. Likewise, lower cost efficiency increases non-performing loans. The result also support the hypothesis of bad management proposed by Berger and DeYoung (1992) that poor management in the banking institutions results in bad quality loans, and therefore, escalates the level of non-performing loans.

Suggested Citation

  • Mohd Zaini Abd Karim & Sok-Gee Chan & Sallahudin Hassan, 2010. "Bank Efficiency and Non-Performing Loans: Evidence from Malaysia and Singapore," Prague Economic Papers, Prague University of Economics and Business, vol. 2010(2), pages 118-132.
    • Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:2:id:367:p:118-132
    DOI: 10.18267/j.pep.367
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    More about this item

    Keywords

    bank efficiency; problem loans; stochastic cost frontier; tobit regression;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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