The aim of this paper is to investigate efficiency performance
of Malaysian banking market using data envelopment analysis approach in
the context of the increasing presence of foreign banks. Specifically,
two measures of efficiency are constructed, cost and profit efficiency
by utilizing bank-level data of Malaysian commercial banks, over the
period 2003 to 2014. The results obtained show the domestic banks are
more efficient than the foreign banks counterparts for both measures of
efficiency. Next, the Lerner Index approach is employed to measure
competition and finally, Granger causality tests are undertaken to
answer the question, does competition foster efficiency? The results of
causality tests support a positive effect of competition on cost and
profit efficiency of Malaysian banks. With regard to the financial
liberalization, the findings imply that higher competitive pressure may
be offset the market power of individual banks; however, eventually it
will results in efficiency gains of Malaysian banks.