IDEAS home Printed from https://ideas.repec.org/a/prg/jnlpep/v2010y2010i2id367p118-132.html
   My bibliography  Save this article

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

Author

Listed:
  • 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, University of Economics, Prague, vol. 2010(2), pages 118-132.
  • Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:2:id:367:p:118-132
    as

    Download full text from publisher

    File URL: http://www.vse.cz/polek/download.php?jnl=pep&pdf=367.pdf
    Download Restriction: free of charge

    File URL: http://www.vse.cz/pep/367
    Download Restriction: free of charge

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Greene, William H., 1980. "Maximum likelihood estimation of econometric frontier functions," Journal of Econometrics, Elsevier, vol. 13(1), pages 27-56, May.
    2. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    3. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November.
    4. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    5. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters,in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
    6. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
    7. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
    8. Claudia Girardone & Philip Molyneux & Edward Gardener, 2004. "Analysing the determinants of bank efficiency: the case of Italian banks," Applied Economics, Taylor & Francis Journals, vol. 36(3), pages 215-227.
    9. Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163.
    10. George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
    11. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 655-672, May.
    12. Altunbas, Yener & Liu, Ming-Hau & Molyneux, Philip & Seth, Rama, 2000. "Efficiency and risk in Japanese banking," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1605-1628, October.
    13. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
    14. Bhattacharyya, Arunava & Lovell, C. A. K. & Sahay, Pankaj, 1997. "The impact of liberalization on the productive efficiency of Indian commercial banks," European Journal of Operational Research, Elsevier, vol. 98(2), pages 332-345, April.
    15. Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December.
    16. Chaffai, Mohamed E., 1997. "Estimating input-specific technical inefficiency: The case of the Tunisian banking industry," European Journal of Operational Research, Elsevier, vol. 98(2), pages 314-331, April.
    17. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ristan Stijepović, 2014. "Recovery and Reduction of Non-Performing Loans – Podgorica Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(3), pages 101-118.
    2. Akinola Ezekiel Morakinyo & Mabutho Sibanda, 2016. "Non-Performing Loans and Economic Growth in Nigeria: A Dynamic Analysis," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, pages 61-81.
    3. Ozili, Peterson K, 2017. "Non-performing loans and Financial Development: New Evidence," MPRA Paper 75964, University Library of Munich, Germany.
    4. Saibal Ghosh, 2016. "Capital Buffer, Credit Risk and Liquidity Behaviour: Evidence for GCC Banks," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(4), pages 539-569, December.
    5. repec:eee:pacfin:v:46:y:2017:i:pa:p:1-13 is not listed on IDEAS
    6. repec:unp:wpaman:201201 is not listed on IDEAS
    7. Alina Georgiana Manta & Roxana Maria Badîrcea, 2013. "Case – study Concerning the Effects of the Macroeconomic Variables on the Loan Portfolios Quality of the Romanian Banking Sector Using the VAR Model and Least Squares Method," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(15), pages 96-103, December.
    8. Saikat Ghosh Roy, 2014. "Determinants of Non-Performing Assets in India - Panel Regression," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(3), pages 69-78.
    9. Subhani, Muhammad Imtiaz & Hasan, Syed Akif & Osman, Ms. Amber, 2012. "Co-Integration in Write Offs ratios of the world," MPRA Paper 45143, University Library of Munich, Germany.

    More about this item

    Keywords

    bank efficiency; problem loans; stochastic cost frontier; tobit regression;

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:prg:jnlpep:v:2010:y:2010:i:2:id:367:p:118-132. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Frantisek Sokolovsky). General contact details of provider: http://edirc.repec.org/data/uevsecz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.