Professional Documents
Culture Documents
SECTOR IN MALAYSIA
BG
173
B713 Corporate Master in Business Administration
2012 2012
Pu ' . J. ... . :. ~ . 4.. "
UNJVERSJll en. ~
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MALAy LA SARAWAK
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1000246523
0'his paper is to analyze and detennine the factors that affecting the financial sector
perfonnance in Malaysia for the period of five years, from year 2006 to 2011. From
the study, the result shows that, the perfonnance of Malaysian financial sector is
regulations and the strong financial capital. However, the global financial crisis
occurred during year 2008 to 2009 was affected the financial sector globally and
affected the financial institution's service qualit~ The study will use the financial
ratios and apply the CAMEL Model namely, Capital adequacy, Asset quality,
Management, Earnings, and Liquidity to detennine the factors affecting the financial
I
sector perfonnance. So, in order to identify the detenninants of perfonnance of
Malaysian financial sector during 2006 to 2011, this study has chosen mUltiple
regression analysis. Besides that, the dependent variables are consisting profitability
ratio, which Return on Assets (ROA) and Return on Equity (ROE), then independent
variables are the CAMEL Methods. So from the study, the results also shows that, the
ROA and ROE are depends on the CAMEL. Lastly, there are a significant
families, who have always encouraged and guided me to be independent, never try to
limit my aspirations.
I would like to express my great appreciation to my supervisor, Dr Chu Ei Yet for his
guidance and critics of the research paper have been an enormous help. Words alone
ii
,....
,.
TABLE OF CONTENT
ABSTRACT i
AKNOWLEDGEMENT ii
LIST OF FIGURES v
LIST OF TABLES v
LIST OF ABBREVIATIONS vi
1. INTRODUCTION
1.1 Background 1
Sector 6
1.9 Conclusion 20
2. LITERATURE REVIEW
2.1 Introduction 21
2.3.3 Management 29
iii
,...
2.3.4 Earnings 30
2.3.5 Liquidity 31
Profitability 32
3. METHODOLOGY
3.1 Introduction 34
3.2 Data 35
3.3 Sample 35
3.7 Conclusions 45
Variables 46
REFERENCES 61
iv
..... I
LIST OF FIGURE
Figure 1: Malaysia Real Growth Rate ........ ...... . ... ....... . .. ... ..... .......... ........... 5
Figure 2: Malaysia GDP Per Capita (US$) ............... ...... .................... .......... 5
Figure 5: Trend Analysis of ROE of Malaysian Financial Sector ... ....... . ... ...... ....49
LIST OF TABLES
Table 3: Independent Variables and their Proxies .............. ........ ................... .42
Table 4: Descriptive Analysis for the Dependent and Independent Variables ..... . ... .47
Table 5: Correlation between ROA and all ratios ...... . . ........... . ... , '" ., ....... ...... 50
Table 6: Correlation between ROE and all ratios ........... ......... ...................... .51
v
,...
....
LIST OF ABBREVIATIONS
EARN Earnings
LIQ Liquidity
MNGT Management
vi
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,.......
vii
CHAPTER 1
INTRODUCTION
1.1 Background
The global financial crisis from 2008 t02009 had brought huge impact for the world
economy due to the price of the assets which has been over inflated and caused the
sub-prime mortgage booming and exploding into housing and banking crisis with a
cascading effect on consumer and investment demand. In addition, the financial market
becomes panic due to the subprime mortgages and the failures of Lehman Brothers
and Washington Mutual in United States .The government of United States had
implemented some solutions and actions to reduce the panics during the first half of
October by promoting the liquidity and the solvency of the financial sector, reducing
the prices for the asset classes and the commodities, the cost of the corporate and the
bank borrowing rose significantly and high volatility in financial market which
increasing infrequently? In the case of Malaysian economy, the country's economy was
sheltered from the direct effects of financial exposure because the new derivatives were
not allowed into the country. The global financial crisis may result the Government's
plans to achieve vision 2020 being interrupted because of decreasing in the exports and a
The financial services sector is the bedrock of any economy. It is the key to the overall
industries in the economy. All large and successful economies require strong banks
Moreover, the sector is also a core component in a services-based economy and a key
...__...._--==========-=-:-------:::---=---=------- ---_.
,...
financial services centres worldwide, the financial sector growth comes from serving
domestic businesses and consumers as well as tapping external markets and sources of
, funds.
Mansor (2007) states that financial liberalization and development has been the major
country and it also witnesses a respectable economic growth and rapid financial
Malaysian financial sector has undergone significant transformation and progress. The
landscaping had been improved due to the transformation and deregulation and
liberalization. Moreover, a stable and effective financial sector will affect the
performance of the financial sector and it will become an important pillar of strength
in our economy.
Schumpeter (1911) contends that the services provided by the financial intermediaries
are essential drivers for innovation and growth. Well developed financial systems
II channel financial resources to the most productive use. Malaysia's Prime Minister,
Dato' Sri Mohd Najib bin Tun Hj Abdul Razak states that financial sector in Malaysia
is expected to have a greater role in assisting the economic growth as Malaysia transit
towards achieving a developed economy status by year 2020. The financial sector is
able to assist the economy growth and encourage the economy transformation into the
next phase of development and provide the world class, high value added financial
products and services at the competitive prices and speed up the new economic
sectors. In order to enhance the economy's expansion, Government has taken the
initiatives to promote structural change within the economy and diversify the sources
of the financial sector's growth by offering liberalisation package from 2009 to 2012.
The foreign equity limits of investment banks, Islamic banks, insurance companies
and Takaful operators had increased from 40 percent to 70 percent. The alliances will
strengthen business potential and enhance the growth of the financial institutions
through international expertise and global network foreign shareholders. The rapid
growth and the strong financial sector of the country will enable the consumers to get
more infonnation, between the financial service providers, the regulators and the
authorities will need to provide the conducive environment that raises the consumer
empowennent. The more consumers can afford and able to buy the products or
financial sector.
As a result, the financial sector plays crucial role for the economic growth and the
country's development. From Table 1 it shows that then financial sector comprises of
holding companies, stock broking companies, finance companies and the exchange
holding companies. The lists of the financial institutions in Table 1 are public listed
,...
Code in
Bursa Financial Insituitions Type of Firms
5185 Affin Bank Bhd Commercial bank
1015 Ambank(M) Bhd (AMMB) Commercial bank
1155 Malayan Banking Bhd Commercial bank
1295 Public bank Berhad Commercial Bank
5258 BIMB Holding Bhd Investment holding company
2143 ECM Libra Financial Group Investment banking group
6688 Hwang-DBS Malaysia Bhd Investment company
3379 Insas Berhad Investment holding company
6483 K&N Kenanga Holding Bhd Investment company
8621 LPI Capital Bhd (Lonpac Insurance) Investment holding company
6459 MNRB Holding Bhd Investment holding company
1236 MBF Holding Group (MBFHLDG) Investment holding company
5053 OSK Investment bank Bhd Investment holding company
6009 Pacific&Orient Berhad
Insurance company
4782 PacificMas Bhd (PACMAS)
Investment holding company
1066 RHB CAPITAL
Investment company
9296 RCE Capital
Investment company
4898 T A Enterprise Bhd
Investment holding company
1163 Allianz Malaysia Bhd
Insurance company
5097 KURASIA (Kumia Asia Bhd)
Insurance company
1198 MAA
Insurance company
1058 MANULIFE
Insurance company
6139 TAKAFUL
Insurance company
5088 APEX Equity Holding Bhd
Stock broking company
1818 Bursa
Exchange holding company
1171 MBSB Exempt Finance Company
Malaysia is a rapidly developing economy in Asia, and the financial services sector is
an integral component of the economy. The total population of Malaysia was 28.3
million (Census 2010). Besides that, Malaysia's GDP has a strong growth in year
2010, as shown in the Figure 1, the Malaysia real GDP growth rate was -7.2 percent,
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Pu ot Khidmat Maklumat Akademik
UNlVERSm MALAYSIA SARAWAK
largely driven by the Services sector and Manufacturing sectors of 6.8 percent and
11.4 percent respectively (Department of Statistic, Malaysia 201 O).This is the 'positive
sign for the country since 2008 and 2009 which real GDP growth rate was -1.6
8.00%
1
7.00%
6 .00%
5 .00%
4.00%
~ 5.20%
j
1 .00%
0.00%
,
-1.00%
2006 2007 2008 2011
-2 .00%
Figure 2 shows that the Malaysia's GDP per capita was US$14,744 and estimate that
in the Year 2011 the GDP Per Capita will increase to US$15,579. As a result,
Malaysia is a middle income country with the openness of economy to encourage the
$14,000
$13,000
-+- GDP Per Capita (USS)
S12,OOO
$11,000
$10,000
2006 2007 2008 2009 2010 2011
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1.1.2 Malaysian Financial System
The Malaysian Financial System consists of Bank Negara Malaysia (Central Bank of
banks and Islamic banks) and a miscellaneous group (discount houses and
representative offices of foreign banks).As shown in Table 2 shown that the Malaysia
fmancial system is structures into two major categories, Financial institutions and
Financial Market. The Financial Institutions comprise Banking System and Non-bank
markets, which is Money and Foreign Exchange Market, Capital Market, Derivatives
Market, and Offshore Market. Besides that, the banking system is the largest
component of the financial system, accounting for about 67% of the total assets of the
fmancial system.
On the other hand, the Asian financial crisis of 1997 and 1998, had give a valuable
consolidation of 22 banks into 9 anchor banking groups has created sizeable and
profitable institutions that have stayed strong throughout the recent global financial
crisis. The strong capital positions of banks, coupled with ample liquidity in the
financial system, provided a buffer against the global downturn. The levels of non
Besides that, the debt market activities have remained strong, and Malaysia continues
to be the third largest domestic currency bond market in Asia excluding Japan. In
2009 total corporate debt issuance increased 22 percent year-on-year to reach RM61
billion. In 2009, Malaysia had a dominant share in the global sukuk issuance market,
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accounting for 47 percent of the global market. Malaysia also has the largest Islamic
recognised as a centre for product innovation in the realm of Islamic finance. The
growth of Islamic finance owes much to the strong legal and regulatory framework
that has been established here. In addition, Malaysia has been recognised
competitiveness and broadened its activities. However, some segments like banking
are maturing. With a population of 28 million people, the domestic market lacks the
necessary critical mass to further develop these segments. Going forward, there is a
need to look externally for growth and to develop new engines of growth.
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Table 2: The Malaysian Financial System
Commodity Futures
Non-Bank Financial Intermediaries
KUBOR Futures
(NBFI)
I Offshore market
Provident and pension funds Labuan International Offshore
Insurances companies Financial Centre
(Including Takaful)
Reinsurance cos.
Development finance Institutions
Saving Institutions
National savings bank
- Co-operatives
OtherNBFI
- Unit trusts
- Universal brokers
- Cagamas Bhd
Leasing companies
- Factoring
- Venture capital
Source: Bank Negara Malaysia, the Central Bank and the Financial System in
Malaysia
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1.1.3 Challenges in Malaysian Financial Sector
There are some challenges that being faced by the Malaysia financial sectors. First,
the industry has gone through a phase of consolidation, the segment such as
investment banking and brokerage remain fragmented. Besides that, many of the
Malaysian banks are still significantly smal1er than regional powerhouses. Apart from
this, there is lack critical mass to attract significant levels of investment in Malaysian
capital market.
Second, Malaysia's financial markets are lack of liquidity and diversity in capital
markets. Before the Asian financial crises in 1997 and 1998, the capital markets have
lost some of their vitalities. Moreover, Malaysia's liquidity ranking in Asia has
dropped from 3rd in 1996 to 14th in 2010 (The World Factbook). Between, there is
Third, the level of personal financial literacy is low, thus the growing consumerism as
economy. Lastly, the competition from other regional financial centres will affect the
performance of the local financial services sector. Malaysia continues to face negative
perception issues due to the capital control measurement implemented during the
Asian financial crisis. In addition, the foreign financial centres have developed their
reputations as being open and pro-business. As a result, the foreign investor interest is
Hence this study is to investigate and analyze the factors that affecting the financial
sector performance for the period 2006 to 2011. A question appeal from the study is
how the financial sectors services performs during the 2008 to 2009 and then after the
financial crisis. A large number of studies on the banking sectors examme the
The study investigates the performance of Malaysian financial services sector during
2006 to 2011 period. The study focuses largely in the context of CAMEL, which are
This chapter will proceed with the description of the problem statement and research
objective. The significance of research will end with the research scope, assumption
and limitation. Chapter 2 will be focusing on the literature that related to performance
of financial sectors in Malaysia and South East Asia by various authors, the definition
of CAMEL components and the relationship between the CAMEL and the
where it begins with the description of data sources and follows with the explanation
on the analysis of data. As well as the components of the CAMEL and the financial
ratios used to evaluate the performances of the financial services sectors. Chapter 4
represents and discusses the findings. It includes analysis of data for the financial ratio
management, earnings and liquidity. Chapter 5 concludes the research findings and
The Malaysian financial sector plays a crucial role in the economy. Therefore, the
instability of the financial sector will affect the economy development and overall
country's development. Mansor (2007) states that financial liberalization has been a
financial feature in many nations to develop and liberalize financial markets. This
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follows the argument that the development of the financial sector can promote growth.
The economic growth will encourage more financial institutions, financial products
and services emerge in the markets in response to the higher demand of financial
services.
However, the presence financial institutions in the Malaysia financial sector raised
some challenges which are lack of scale, lack of liquidity and diversity in capital
market, low levels of financial literacy and competitions from other regional financial
centre. Lensik, R. & Hennes, N. (2004) claims that the entrance of foreign investors
had increased the market competitions and improves the quality and the availability of
foreign financial institution and motivate the local financial institutions to enhance
their efficiency and increase the diversity and quality of financial services. The
restructuring of the financial system policy by the Malaysian government after the
economic recession during had brought the important of the growth for local financial
development.
Malaysia because of the stability of the financial services sector will encourage
economic growth and fast growing for a country development. Apart from that,
and stock broker. In order to evaluate the financial sectors perfonnances, the CAMEL
method was applied and as supervision tool and measure the bank's current overall
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analysis will assists the financial institutions expand their financial services to the
The study is to identify what kind of factors will affect the performance of the
financial sector. Besides that, the relationship between the performance of the
fmancial sectors and the factors will be examined and analyzed in this study.
Although, there are many study had been done to analyze the financial sector around
the world based on the economic development and the financial indicators. However
the study will use the financial ratios to analyze the performance of financial
holding companies, stock broking company, finance company and the exchange
holding company.
Agency theory or agency relationship is the theory which concern to the relationships
between the owners of the company in the form of shareholders (equity investors) and
those appointed to in charge for the company management, which is a director of the
company. The agency theory plays a crucial role for every aspects of the business
activity especially for the decision-making by directors, which included executive and
non-executive directors). In addition, the agency concepts had became more important
due to the global financial crisis, especially the corporate collapses of the major
multinational companies for instance Enron 2001, WorldCom 2001, and Lehman
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The theory stated that, the owner of the company assigns the day to day decision
making to the directors, who are shareholder's agent. Besides that, the agents are no
necessary to make decisions according to best interest of the principal. The personal
interests of company's senior managers can differ from the company shareholders.
The manager and the owner of the company are differing to each other. As a result,
the board of director of the company plays a crucial role in balancing and control the
action of the senior management, who control day to day operation of the company
Apart from that, the agency relationship occurred because of the different goals and
interests among the agents and the principals. Bohren (1998) assumed that the
individual agents and principal that involved in the agency relationship are
opportunistic, due to they are aiming to maximize their own interest. Thus, there is no
guarantee that agents will always act in the best interest for their principals. Therefore,
if the company unable to manage their agency problem in their company, so it will
affect the company performance due to agents will only aim to maximize their own
According to the theory of the firm which views a firm as a "nexus of contract"
between parties and with conflicting interests (Jensen and Mekling, 1976), the agency
problem may occurred among all stacks holders within the company. However, the
(agent) and its owner (principal). Also, the corporate governance is widely accepted
as a mechanism that makes the management (agent) operate the firms not for him own
sake, but for the interest of the owner (principal). According to the work Fama and
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Jensen (1983) which views an owner as a "residual risk bearer" and "residual
claimholder", a shareholder generally refers to the owner as who bears the residual
risk. There is a substantial research studying the agency problem focusing on the
However, the agency problem is not limited to the shareholders and management, but
extends to the company's stakeholders. One of the most critical is the conflicts of
interest between shareholders and debtholders. In a company, only after interest and
other payments are paid to its debtholders, then shareholders hold unlimited claims
for the remainder. On the other hand, debtholders have fixed size senior claims to the
company's cash flows. This arrangement creates incentives for shareholders to pursue
may transfer wealth from debtholders to shareholders, which goes against the
debtholders' interest.
The agency problem between the shareholders and debtholders is more important in
financial institutions because they hold their customers' funds as debt, and therefore
companies. In a commercial bank, fixed claims are widely dispersed among many
small deposit holders. In this situation, due to the well-known "free rider problem",
each deposit holder has little incentive to monitor and control business decisions made
exacerbates this type of moral hazard. Therefore potential agency costs incurred
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institution or product. However, the complexity and information asymmetry which lie
in financial products can hamper the effective operation of market discipline. The
customers' lack of expertise and the aforementioned free rider problem. In the end,
the government may have to step in and represent the interest of customers and
today's market, this takes the form of regulations and supervision over financial firms.
lIDs provides partial explanation why regulations and supervision over the financial
industry are generally stronger than those over the general manufacturing industry.
Figure 3 shows that the diagram of the determinants for the performance of the
Furthermore, the dependent variables are Return on Asset (ROA) and Return on
Equity (ROE). The performance of the financial sector will evaluate by using the
financial ratio. The capital adequacy is related to the overall financial leverage of the
firms. The high financial leverage will experience more volatile earni~g behavior. As
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