Efficiency, Asset Quality and Stability of the Banking Sector in Malaysia

Malaysia practices a dual banking system, where conventional banks coexist with Islamic banks. While conventional banks are well established, Islamic banks are growing rapidly. Since Islamic banks consist of two types, namely stand-alone or wholesome Islamic banks and Islamic subsidiaries of conventional banks, it would be revealing to examine if Islamic subsidiaries of conventional banks differ from standalone Islamic banks in terms of efficiency, stability and assets quality. A few studies in the literature that examine the issue have focused on comparisons between Islamic banks and conventional banks, with no consideration given to the differentiation between the two categories of Islamic banks. In this paper, we attempt to examine the differences among the players in the banking sector in Malaysia. This paper extends the traditional analysis of conventional versus Islamic banks to comparisons between stand-alone Islamic banks and Islamic subsidiaries of conventional banks. Using dynamic panel data “generalized methods of moments” (GMM), the study reports that there are differences among different types of banks, viz. conventional banks, Islamic subsidiaries of conventional parents, and stand-alone Islamic banks. It shows that Islamic subsidiaries of conventional banks perform better than stand-alone Islamic banks as well as their own conventional parents. Furthermore, the results show that Islamic subsidiaries are more stable in term of their financing income compared to the rest of the banks, while the stand-alone banks have lower asset quality in comparison with both Islamic subsidiaries and their parents.