Drivers of technical efficiency in Malaysian banking: a new empirical insight Asish Saha, Nor Hayati Ahmad, and Umakant Dash* Restructuring and rationalisation of Malaysian banking in 2000 and the subsequent policy of deregulation and liberalisation adopted by Bank Negara Malaysia (BNM) have resulted in a significant transformation of Malaysian banking. Banks are now poised to play a pivotal role in the economic transformation of the economy as envisaged in the Financial Sector Blue Print 2011–20 of BNM. Using the data envelopment analysis technique, the technical efficiency of 19 commercial banks (8 domestic banks and 11 foreign banks) operating in Malaysia during 2005–12 is evaluated. Then, using bootstrap-corrected efficiency scores, the drivers of bank efficiency were estimated using the Tobit regression approach. Results clearly show that three large domestic banks are not only more efficient than their counterparts, but are also more efficient than the foreign banks. Bank size and return on assets are found to be the signifi- cant drivers of technical efficiency of Malaysian banks. Capital adequacy and the advances to deposit ratio also have a role in driving technical efficiency. The results also indicate that banks that are more effective in managing credit risk, as reflected in a lower level of non-performing assets as a percentage of total assets, and have lower levels of personnel expenses to total assets, are more efficient. The findings have significant implica- tions at the individual bank level and also at the policy level. Introduction Prior to the Asian financial crisis (1997), the Malaysian banking system was fragmented, with 77 domestic banking institutions, includ- ing 22 domestic and 16 foreign commercial banks. The banking system underwent restruc- turing, consolidation, and rationalisation during 2000, under the initiative of the central bank, Bank Negara Malaysia (BNM), to achieve ‘a more effective and competitive banking system’ (BNM 2000). Today, there are 34 banking institutions, including 8 domestic and 19 foreign commercial banks. Over the course of implementation of the first Financial Sector Master Plan (FSMP) since 2001, the financial sector has expanded at an average annual rate of 7.3 per cent; to account for 11.7 per cent of real GDP in 2010 compared with 9.7 per cent in 2001. Domestic banks have accumulated strong capital and loan loss buffers, with improve- ments in underwriting and risk manage- ment practices, as well as strengthened govern- ance structures and discipline. During this period, the Malaysian financial system became * Asish Saha, Visiting Professor, School of Economics, Finance and Banking, Universiti Utara Malaysia; Nor Hayati Ahmad, Professor, Banking and Risk Management, School of Economics, Finance and Banking, Universiti Utara Malaysia; Umakant Dash, Professor, Department of Humanities and Social Sciences, Indian Institute of Technology Madras. doi: 10.1111/apel.12091 161 © 2015 Crawford School of Public Policy, The Australian National University and Wiley Publishing Asia Pty Ltd.