Financial Sector Liberalization, Foreign Banks Entry And Domestic Banks Performance: Malaysia’s Initial Post- Liberalization Experience

By  Fadzlan Sufian & Nor Halida Haziaton Mohd Noor

Abstract

This paper seeks to examine the impact of foreign banks entry on the performance of the Malaysian banking sector. The empirical analysis is confined to the two full-fledged domestic Islamic banks, three fullfledged foreign Islamic banks, 11 domestic IBS banks, and 4 foreign IBS banks during the period of 2001-2007. The findings suggest that the incumbent banks are relatively more profitable compared to the De Novo Islamic banks. We find that the De Novo Islamic banks are relatively smaller, better capitalized, disbursed lower amount of loans, incur relatively higher operating costs, and have lower credit risk. We find that the Malaysian Islamic banks are better capitalized and larger, but recorded lower profitability during the post-entry period. The empirical findings seem to suggest that Malaysian Islamic banks incur higher operating costs during the post-entry period. The results also suggest that Malaysian Islamic banks have disbursed a lower amount of loans during the post-entry period, but the credit risks seem to have escalated.