An Empirical Investigation on the Efficiency of the Financial Companies in Malaysia with DEA Model

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1 Aerican Journal of Inforation Science and Coputer Engineering Vol. 3, No. 3, 207, pp ISSN: (Print); ISSN: (Online) An Epirical Invetigation on the Efficiency of the Financial Copanie in Malayia with DEA Model La Weng Siew, 2, 3, *, Liew Kah Fai, 2, 2, 3, La Weng Hoe Departent of Phyical and Matheatical Science, Faculty of Science, Univeriti Tunku Abdul Rahan, Kapar Capu, Kapar, Perak, Malayia 2 Centre for Matheatical Science, Univeriti Tunku Abdul Rahan, Kapar Capu, Kapar, Perak, Malayia 3 Centre for Buine and Manageent, Univeriti Tunku Abdul Rahan, Kapar Capu, Kapar, Perak, Malayia Abtract Efficiency i one of the ot iportant criteria in today globalied and copetitive world. Efficiency decribe how well the copanie can generate their output fro the reource available. The objective of thi paper i to evaluate and copare the efficiency of the copanie fro the financial ector in Malayia with Data Envelopent Analyi (DEA) odel. In DEA odel, the efficiency of the copanie i eaured a the ratio of u-weighted output to u-weighted input. In thi tudy, the data conit of the copanie fro the financial ector in Malayia fro year 200 until 205. The reult of thi tudy how that AEONCR, ALLIANZ, APEX, BURSA, LPI, MANULFE, OSK, PBBANK and TA are claified a efficient copanie. Thi iplie that thee copanie are in optial control of their input or reource to generate axiu output. Thi tudy i ignificant becaue it help to identify the efficient copanie fro the financial ector in Malayia baed on ultiple input and output by uing DEA odel. Keyword Efficiency, Linear Prograing Model, Optial Control, LINGO Received: March 6, 207 / Accepted: April 7, 207 / Publihed online: June 4, 207 The Author. Publihed by Aerican Intitute of Science. Thi Open Acce article i under the CC BY licene. Introduction In today globalied and copetitive world, efficiency becoe the ot iportant criterion in every field. Efficiency decribe how well the copanie can generate their output fro the reource available. Efficiency i iportant to deterine the perforance of the copanie []. Thi tudy focue on the evaluation of the financial copanie efficiency in Malayia by uing Data Envelopent Analyi (DEA) odel. DEA i a atheatical linear prograing odel which ai to eaure the efficiency of the copanie [2]. DEA odel wa originally introduced by Charne et al. [3], known a CCR odel. DEA i a linear prograing odel which can handle ultiple output and input iultaneouly. The unit that achieve an efficiency core of 00% will be claified a efficient unit, otherwie, the unit will be treated a inefficient unit [3, 4]. The objective of thi paper i to evaluate and copare the efficiency of the financial copanie in Malayia tock arket with DEA odel. The ret of the paper i organized a follow. The next ection decribe the literature review of DEA odel in the evaluation on the efficiency of the copany. Section 3 dicue about the data and ethodology of the tudy. Section 4 preent the epirical reult of thi tudy. Section 5 conclude the paper. 2. Literature Review Repkova [5] ha aeed the efficiency of the Czech banking ector by uing DEA odel. The ource of the data wa * Correponding author E-ail addre: law@utar.edu.y (L. W. Siew), liewkf@utar.edu.y (L. K. Fai), whla@utar.edu.y (L. W. Hoe)

2 33 La Weng Siew et al.: An Epirical Invetigation on the Efficiency of the Financial Copanie in Malayia with DEA Model La Weng Siew collected fro the databae Bank Scope and annual report of coercial bank. The coercial bank were CS, CSOB, GEM, JTB, KB, LBBW, POPO, PPF, RB, UNIC and Volkbank. The reult howed that the overall efficiency of coercial bank anaged to achieve approxiately 70-78% by DEA odel. GEM bank wa identified a the ot efficient bank a it achieved the highet efficiency core. In addition, the reult alo revealed that the group of large bank uch a CSOB, CS and KB bank achieved lower efficiency core due to the inappropriate ize of operation and the exce depoit in the balance heet. Zikova [6] ha evaluated the efficiency of the banking ector in Slovakia. Sixteen coercial banking intitution in Slovakia naely Citi Europe plc., CSOB, ING Bank N.V., J&T Banka, Koercnibanka, Oberbank AG, OTP banka, Pria banka, Privatbanka, Potovabanka, SLSP, Tatrabanka, Uni Credit Bank, Volkbank, VUB and Zuno Bank AG were evaluated in ter of the efficiency. Baed on the reult, there were total of nine coercial bank identified a efficient bank. Repkova [7] ha eaured the efficiency of the Czech banking ector by uing DEA odel. There were total of 5 Czech coercial bank evaluated in thi tudy. The overall efficiency core achieved by the coercial bank wa 6 to 90%. Sahin et al. [8] have applied the DEA odel to exaine the effect of global crii on public, private and foreign-capital depoit bank in the Turkih banking ector perforance. There were total of 9 unit aeed in thi tudy. Baed on the reult, the overall efficiency core of 00% that reached by public-capital depoit bank only can be oberved in year On the other hand, the foreigncapital depoit bank that obtained the overall efficiency core of 00% in the conecutive five year, fro year 2007 until 20. The private-capital depoit bank did not achieve 00% efficiency in hi tudy. In addition, DEA odel ha been applied in variou field uch a health care [9-], tranportation [2], plantation [3] and o forth. Baed on the pat reearch, DEA odel i able to evaluate and copare the efficiency of the copanie baed on ultiple input and output in variou countrie. However, thi odel ha not been tudied actively in Malayia. Therefore, thi paper ai to fill the reearch gap by evaluating and coparing the efficiency of the financial copanie in Malayia by uing DEA odel. 3. Data and Methodology 3.. Data In thi tudy, the data conit of the copanie fro the financial ector lited in Malayia tock arket a hown in Table. Table. Copanie fro the Financial Sector in Malayia Stock Market. CopanyNae Abbreviation Code AEON Credit Service (M) Berhad AEONCR 539 Affin Holding Berhad AFFIN 585 Alliance Financial Group Berhad AFG 2488 Allianz Malayia Berhad ALLIANZ 63 AMMB Holding Berhad AMBANK 05 APEX Equity Holding Berhad APEX 5088 BIMB Holding Berhad [S] BIMB 5258 Bura Malayia Berhad BURSA 88 CIMB Group Holding Berhad CIMB 023 ECM Libra Financial Group Berhad ECM 243 Hong Leong Bank Berhad HLBANK 589 Hong Leong Capital Berhad HLCAP 5274 Hong Leong Financial Group Berhad HLFG 082 Hwang Capital (Malayia) Berhad HWANG 6688 InaBerhad INSAS 3379 Kaf-Seagroatt& Capbell Berhad KAF 5096 LPI Capital Bhd LPI 862 MAA Group Berhad MAA 98 Manulife Holding Berhad MANULFE 058 Malayan Banking Berhad MAYBANK 55 Malayia Building Society Berhad MBSB 7 MNRB Holding Berhad MNRB 6459 OSK Holding Berhad OSK 5053 Pacific & Orient Berhad P&O 6009 Public Bank Berhad PBBANK 295 RCE Capital Berhad RCECAP 9296 RHB Capital Berhad RHBCAP 066 TA Enterprie Berhad TA 4898 Syarikat Takaful Malayia Berhad [S] TAKAFUL 639 Source: (Bura Malayia [4]) There are total of ix financial ratio identified in thi tudy, which are current ratio, debt to aet ratio, debt toequity ratio, earning per hare (EPS), return on aet (ROA)and return on equity (ROE). The data are collected fro their repective copanie financial annual report on Bura Malayia fro year 200 until 205 [4]. The financial ratio i defined a a relationhip between two individual quantitative financial inforation connected with each other in oe logical anner [5]. The financial ratio analyi ha been adopted by different reearcher in the pat tudie [6-9]. In thi tudy, current ratio, debt to aet ratio and debt to equity ratio are the input to deterine the efficiency of the copanie. Output that conidered in thi tudy are earning per hare (EPS), return on aet (ROA) and return on equity (ROE). Current ratio eaure a copany' ability to counter balance current aet with the current liabilitie [20]. Debt to aet ratio i a eaure of financial leverage defined a debt divided by total aet, wherea debt to equity ratio i the relative proportion of hareholder' equity and debt ued tofinance a copany' aet [2]. Earning per hare (EPS) i the onetary value of earning per outtanding hare of coon tock for a copany [2]. Return on aet (ROA) decribe how productively a copany ue it aet to yield profit [22]. Return on equity (ROE) eaure acopany

3 Aerican Journal of Inforation Science and Coputer Engineering Vol. 3, No. 3, 207, pp efficiency at generating profit fro every unit ofhareholder equity [23]. Equation () to (6) preent the forula for the financial ratio ued in the evaluation of the copany efficiency [24]. Current aet Current ratio = () Current liability Total liability Debt to aet ratio= Total aet (2) Total liability Debt to equity ratio= Total hareholder' equity (3) Net profit Earning per hare= Nuber of hare (4) Net profit Return on aet= 00% Total aet (5) Net profit Return on equity= 00% Total hareholder' equity (6) 3.2. Data Envelopent Analyi Data envelopent analyi (DEA) i a atheatical linear prograing odel which i utilized to evaluate the relative efficiency of the deciion aking unit. DEA odel i ued to decribe how efficient the deciion aking unit are able to tranfor the input into output or outcoe. In DEA odel, the efficiency of the unit i expreed a the ratio of the u-weighted output to u-weighted input. DEA odel i able to handle ultiple output and input iultaneouly. The organization unit i identified a an efficient unit if they obtain an efficiency core of 00%. For thoe copanie that fail to achieve 00% efficiency, they will be claified a inefficient unit. The DEA odel i forulated a follow: Subject to t y Maxiize r= hk = wx r rj r = i= t y wx i ij i= r rk i ik, j =,2,3,..., n (7) (8) t ε, r =,2,3,..., (9) r w ε, i =,2,3,..., (0) i where h k i the relative efficiency of DMU k i the nuber of output t r i the weight to be deterined for output r y rj i the oberved agnitude of r-type output for entity j i the nuber of input w i i the weight to be deterined for input i x ij i the oberved agnitude of i-type input for entity j ε i the poitive value n i the nuber of entitie Equation (7) i an objective function which axiize the efficiency for k-deciion-aking unit (DMU). Contraint (8) enure that the efficiency i 0 < h k for each DMU. The weight w i and t r how the iportance of each input and output in axiizing the efficiency which i deterined by the odel. The odel above i a nonlinear with a linear and fractional objective function a well a the contraint. The odel above can convert to linear prograing for by axiizing the nuerator and etting the denoinator to (Charne et al. [3]; Martic et al. [25]). Subject to Maxiize h i ij r rj i= r = k = tryrk () r = wx t y 0, j =,2,3,..., n (2) wx i ik = (3) r= t ε, r =,2,3,..., (4) r w ε, i =,2,3,..., (5) i The DEA odel i olved by uing LINGO oftware. 4. Epirical Reult The epirical reult for the perforance efficiency of the financial copanie are preented in Table 2. Table 2. Perforance Efficiency of the Financial Copanie in Malayia. Copany Efficiency (%) Rank AEONCR AFFIN AFG ALLIANZ AMBANK APEX 00.00

4 35 La Weng Siew et al.: An Epirical Invetigation on the Efficiency of the Financial Copanie in Malayia with DEA Model La Weng Siew Copany Efficiency (%) Rank BIMB BURSA CIMB ECM HLBANK HLCAP HLFG HWANG INSAS KAF LPI MAA MANULFE MAYBANK MBSB 82.3 MNRB OSK P&O PBBANK RCECAP RHBCAP TA TAKAFUL A hown in Table 2, there are total of nine copanie anage to achieve 00% efficiency core. Thee copanie are AEONCR, ALLIANZ, APEX, BURSA, LPI, MANULFE, OSK, PBBANK and TA. Thee copanie are ranked a efficient copanie ince they anage to achieve 00% efficiency core. Thi iplie that thee efficient copanie are in optial control of their input or reource to generate axiu output or outcoe. For thoe copanie that fail to achieve 00% efficiency core, they are claified a inefficient copanie. Therefore, the copanie uch a AFFIN, AFG, AMBANK, BIMB, CIMB, ECM, HLBANK, HLCAP, HLFG, HWANG, INSAS, KAF, MAA, MAYBANK, MBSB, MNRB, P&O, RCECAP, RHBCAP and TAKAFUL are ranked a inefficient copanie ince thee copanie are not able to achieve 00% efficiency. A hown in Table 2, KAF and MBSB achieve axiu 98.86% and 82.3% efficiency repectively. Thu, KAF and MBSB obtain the tenth and eleventh ranking repectively in thi tudy. On the other hand, MAA, INSAS and MNRB achieve the lat three ranking baed on their efficiency core obtained. Baed on the reult, they obtain the efficiency core of 7.4%, 4.3% and.58%, repectively. Thi iplie that MAA, INSAS and MNRB do not perfor well in ter of efficiency a copared to other copanie. A a recoendation, thee inefficient copanie need to take iediate action in order to iprove their level of efficiency. In uary, the efficient copanie fro the financial ector in Malayia can be identified in thi tudy by uing DEA odel. The efficient copanie are AEONCR, ALLIANZ, APEX, BURSA, LPI, MANULFE, OSK, PBBANK and TA. Other inefficient copanie can enhance their efficiency by taking thee efficient copanie a a benchark in order to achieve optial efficiency. Figure to Figure 9 preent the input and output weight for the efficient copanie. Figure. Input and Output Weight for AEONCR. Figure 2. Input and Output Weight for ALLIANZ. Figure 3. Input and Output Weight for APEX. Figure 4. Input and Output Weight for BURSA.

5 Aerican Journal of Inforation Science and Coputer Engineering Vol. 3, No. 3, 207, pp Figure 5. Input and Output Weight for LPI. Figure 7. Input and Output Weight for OSK. Figure 6. Input and Output Weight for MANULFE. Figure 8. Input and Output Weight for PBBANK. Figure 9. Input and Output Weight for TA. Baed on Figure to Figure 9, the optial input and output weight for the efficient copanie are different. Table 3 preent the optial control of input and output weight (%) in axiizing the efficiency by uing DEA odel.

6 37 La Weng Siew et al.: An Epirical Invetigation on the Efficiency of the Financial Copanie in Malayia with DEA Model La Weng Siew Table 3. Optial Control of Input and Output Weight (%) in Maxiizing the Efficiency. Copany Current ratio Debt to aet Debt to equity EPS ROA ROE (Input ) ratio (Input 2) ratio (Input 3) (Output ) (Output 2) (Output 3) Efficiency (%) AEONCR AFFIN AFG ALLIANZ AMBANK APEX BIMB BURSA CIMB ECM HLBANK HLCAP HLFG HWANG INSAS KAF LPI MAA MANULFE MAYBANK MBSB MNRB OSK P&O PBBANK RCECAP RHBCAP TA TAKAFUL Average A hown in Table 3, DEA odel provide the optial control of input and output weight in axiizing the efficiency for each financial copany. The efficient copanie uch a AEONCR, ALLIANZ, APEX, BURSA, LPI, MANULFE, OSK, PBBANK and TA have fully utilized their input in generating axiu output. The average efficiency for the copanie fro the financial ector i 58.65%. Figure 0 preent the overall input and output weight in the axiization of the efficiency. Figure 0. Overall Input and Output Weight in the Maxiization of the Efficiency. A hown in Figure 0, the overall output weight in the axiization of efficiency i otly contributed by EPS (65.0%), followed by ROE (7.67%) and finally ROA (7.24%). On the other hand, the overall input weight in the axiization of efficiency i otly contributed by debt to aet ratio (79.28%), followed by current ratio (3.00%), and latly debt to equity ratio (7.73%). 5. Concluion DEA odel i utilized to evaluate the efficiency of the organizational unit ince the DEA odel can deal with ultiple input and output iultaneouly. Thi tudy ai to evaluate and copare the efficiency of the copanie fro the financial ector in Malayia by uing DEA odel. The reult of thi tudy how that AEONCR, ALLIANZ, APEX, BURSA, LPI, MANULFE, OSK, PBBANK and TA have fully utilized their input in generating axiu output. Therefore, they are claified a efficient copanie with 00% efficiency core. Thi tudy i ignificant becaue it help to identify the efficient copanie fro the financial ector in Malayia. Beide that, thi tudy alo provide the optial control of input and output weight in axiizing the efficiency for each financial copany by uing DEA odel.

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