Productivity and Technical Change in Malaysian Banking

The growth of productivity in Malaysian banking over the 1989-1998 period, characterized by liberalization and rapid technological change, is traced with the help of Malmquist indices constructed with nonparametric DEA techniques. These indices are decomposed into their pure efficiency, scale efficiency, and technological change components. Our findings indicate an erosion of banking productivity that masks divergent tendencies among its component elements. These are dominated by adverse effects of technological change, which is associated with a reduction in the labor intensity of banking activity. Consistent with the mixed findings reported in the literature, the present investigation suggests that regulatory reform and liberalization are not sufficient conditions for productivity improvement.