Management & Change

This paper investigates performance of Malaysian non-bank financial institutions during the period of 2000–2004. Several efficiency estimates of individual NBFIs are evaluated using the non-parametric Data Envelopment Analysis (DEA) technique. To examine the impact of risk factor on NBFIs efficiency, it has been attempted to incorporate provisions for defaulted loans as a non-discretionary input variable in the analysis. It is found that during the period of study, scale inefficiency dominates pure technical inefficiency in the Malaysian NBFI sector. It is also found that the merchant banks have exhibited higher technical efficiency compared to its finance companies peers. The empirical findings suggest that potential economies of scale may be overestimated when risk factors are excluded and scale efficiency tends to be more sensitive to the exclusion of risk factor. As the actual potential economies of scale may significantly be lower than initially expected, policy makers should be more cautious in promoting mergers as a mean to achieve greater financial institutions’ efficiency by attaining better economies of scale. This paper covers brief overview of the Malaysian financial system, review of related studies, outline of approaches for measurement and estimation of efficiency change, analysis and results, and finally conclusions.