Recapitalization Effectiveness and Performance of Banks in Malaysia

Recapitalization through capital injection is one of the strategies for banks to strengthen their banking system from the possibility of bank failures. Banks cannot deny that capital is one of the most important components to run their business. In spite of that, few studies have been conducted to assess the effectiveness of such strategy on Asian banks. This paper investigates the effectiveness of capital injection in the Malaysian banking sector which was adversely hit by the financial crisis. Panel data from 1997 to 2014 was used. The financial data is obtained from annual reports published in Bank Scope and The World Bank database. The data were processed using Panel Least Square and Random effect model. The empirical analysis reveals that, GDP, CAR, previous year capital injection and loan write-off (LWO) explain 89.6 percent of the variance in capital injection effectiveness. CAR and LWO/TA are significant at 5 percent confidence level. The evidence from the results shows that recapitalization is vital for long term survival of the banking sector. The study recommends that in order to improve the profitability of banking sector, the banks should write off bad loans and ensure they have adequate capital either through capital injection, or growth to withstand financial risks.