The Impact of Financial Liberalisation on Foreign Bank Entry: Malaysian Bank Performance

Abstract

Malaysia has always adopted an approach towards liberalisation that takes into consideration the capacity and readiness of the financial sector to benefit from it while promoting orderly growth and development of the financial sector in a liberalised environment. The purpose of this paper is to assess the impact of financial liberalisation on foreign bank entry in Malaysia. This study investigates the effectiveness of the Financial Liberalization that was implemented by Bank Negara Malaysia on the Malaysia Bank Performance using five controlling variables, which are the size of the bank, leverage, liquidity, type of bank and the bank status. The sampling criteria for this study are to include all the listed banks in Malaysia from the year 2007 to 2020, where all of the banks’ data is collected from the Bankscope database. The findings suggest that the financial liberalisation in 2016 by Bank Negara Malaysia to stabilise the financial market and to increase the local banks’ performance has been effective in achieving its aim. After the financial liberalisation, the local banks’ performance improved compared to the foreign banks. The local banks are more resilient with the strengthened corporate governance, efficient internal structures, robust risk management practices and diversified sources of income. The strengthened capacity has enabled the domestic banks to venture abroad and reap the benefits from new business opportunities. Also, the result suggests that the conventional banks perform better than Islamic banks. Hence, the financial liberalisation purpose is to increase the competitiveness between the local and foreign financial institutions is achieved. Moreover, the analysis in this study faces some limitations and raises some questions for future research. One of the limitations of this study is that the sampling period covers the years of 2007 to 2020 wherein 2015 there was a global financial crisis. This crisis needs to be controlled to minimise the influence of the events on the results