Commercial banking of Malaysia: performance and issues

Abstract

The issues of financing economics development have attracted attention of many researchers over many years. In particular, the subject concerning the relationship between financial development and economic development gain much prominence during 1960s and 1970s. Mention may be made in this connection of studies by Gurley and Shaw (1955, 1960, 1967), Goldsmith (1969), Mckinnon (1973), Bhatia and Khatkhate (1975) and Galbis (1977). It is argued that as financial system influences economic development, it is inturn stimulated by economic growth. Thus the dynamic system of the financial sector of the developing country could imply the effect of growing economic development. Malaysia is a typical instance amongst developing countries where financing developmental activities are geared towards continued needs of the economy. The Malaysian financial sector has experienced an increased growth throughout the two decades (1970-1990). In meeting the continued needs of local developing economy, the expansion of existing financial institutions and the emergence of new financial institutions and instruments have taken place. Finance companies in Malaysia which formed part of the financial institutions started functioning in early 1960s and expanded their operations substantially to become the second largest group of deposit taking financial institutions after the More than 80 percent of the deposits with the finance commercial banks. companies have been in the form of fixed deposits of varying maturities. Besides, it is expected of the finance companies to play some intermediate significant roles in enhancing the pace of economic development. Thus the enormous growth over the past two decades has put the finance companies in a vulnerable position in the overall financial system of Malaysia. However, the relatively little empirical research concerning performance of financial companies and that of commercial banking of Malaysia is surprising given the economic influence which these vital institutions have on the economy. An empirical study on the performance of financial companies of Malaysia was made by Kanbur (1996) and a paper on it was presented at the Winter meeting of South and South East Asian Chapter of World Econometric Society in Dec. 1996 in Delhi (India). From 1980 to 1995, the number of commercial banks which included foreign banks has more than doubled. While the number of foreign banks has remained almost stable the number of domestic banks during this period has inversed more than two and half times.