Ownership and efficiency in Malaysian banking

Changes in the ownership structure have been an important feature of the evolution of the Malaysian banking sector. In 1986, the Banking Act of 1973 was amended to limit equity ownership by individual companies in a bank to 20 percent, and by a family-owned company or an individual person to 10 percent. This paper analyzes whether ownership structure has any effect on bank efficiency in Malaysia. Cost efficiency is estimated using the Stochastic cost frontier approach. Tobit regression analysis is then employed to determine the effect of ownership variables on bank efficiency. The results indicate that first, state-owned banks and local banks are less efficient than privately owned banks and foreign banks, respectively. Second, we find a positive correlation between ownership concentration and firm’s performance suggesting that large investors, to some extent, have the incentive as well as the power to monitor and control the behavior of management, and thus assume a significant role in corporate governance.