The Impact of Ownership Structure, Moral Hazard and Capital Regulation on Risk Taking in Malaysian Banks

This study examines relationship between ownership structure and moral hazard with risk taking of Malaysian banks and also investigates the moderating effects of capital regulation on these relationships. Despite many claims and arguments that associate high risk taking of Malaysian banks with the existence of large shareholders and moral hazard related to loan activities (high loan growth and loan concentration), the practices are still prevailing until present. The fact that banks are highly regulated also creates issue on how regulation moderates the relationship between ownership structure and moral hazard related to loans with bank risk taking. Bank risk taking in this study is measured by standard deviation of return on equity, standard deviation of return on assets and Z-SCORE (insolvency risk). Ownership structure comprised of insider ownership, family ownership, government ownership, institutional ownership and foreign ownership. Moral hazard is proxied by loan growth and loan concentration while capital regulation is proxied by capital adequacy requirement. Using secondary data, total number of observations of this study is 294. Data are collected from 21 commercial banks in Malaysia, comprising of 9 domestic banks and 12 foreign banks over 1990-2008 period. In testing the relationships between ownership structure, moral hazard and capital regulation on bank risk taking, two regression test are used. Multiple regression is used to test the relationship between ownership structure and moral hazard on bank risk taking, while hierarchical moderated multiple regression is used to test the moderating effects of capital regulation on the relationship between ownership structure and moral hazard to bank risk taking. The multiple regression results revealed that different type of ownership structure has different impact on bank risk taking. The results on moral hazard show that loan growth increased insolvency risks of banks, while loan concentration create variation in bank returns (standard deviation of return on equity) but decrease probability of failure (high Z-SCORE) of the banks. Further, hierarchical moderated multiple regression revealed that capital adequacy requirement has significant moderating impact on the relationship between ownership structure and moral hazard with standard deviation of return on equity and insolvency risks. In contrast, it has insignificant moderating effects on the relationship between ownership structures and moral hazard with standard deviation of return on assets. Overall, findings of this study imply that the existence of large shareholders in Malaysian banks does not increase bank risk taking (as measured by variations of returns and insolvency risks), the impact of loan growth in increasing banks risks will only be felt in the long term while loan concentration, although create variation in bank return but would increase bank stability in the long term. The result also imply that capital regulation implemented by Malaysian regulators is appropriate for the Malaysian banks as higher capital adequacy requirements might creates unintended effects whereby banks might response by increasing their risk taking

Mesra Hotel: The challenges in making a dream into a reality

On March 14, 2016, Salina Johan, the owner, cum the general manager of Mesra Hotel, looked out of her office window in disbelief as the rain continued to pour.Thunder and lightning did not seem to bother her.It was already 7 pm and her mind continued to wander.She was thinking about her delayed hotel project. The contractor just called to inform that the project could not be continued unless she paid the progressive payment before the end of the month.Everything seemed perfect before this.Good economic conditions and terrific businesses made her confident that the hotel construction would be completed as planned.Unfortunately, now her life turned upside down.The hotel project had been beyond schedule.The contractor in charge kept asking for more money."I only have two weeks to prepare the money" sighed Salina Johan. The initial cost of building the hotel was RM950,000.Payments were made based on the progress of the work done.Until now, she had paid more than 60 percent of the costs involved. She was very confident that the project would run smoothly.In addition to the amount allocated for the building, she had also put aside RM50,000 for contingency expenses.Additionally, another RM500,000 for the hotel room furniture, lighting and other hotel necessaries.She had invested all her savings to the project.In fact, she had also used cash from her other businesses, a grocery store and a 15-room motel, for the project."Why things do not happen as what I've planned?" sighed Salina Johan in frustration. Everything had become expensive.The supplier charged her higher price for grocery products and hotel's necessaries; using the implementation of goods and services tax (GST), inflation and depreciation of Ringgit Malaysia as excuses; while the motel guests had decreased for about 40 percent.“What should I do? The income from the grocery store and motel has decreased, the price of products has increased and now I am running out of cash to pay the contractor for the hotel project" she said, feeling depressed as the rain was

An Empirical Analysis of Liquidity Risk and Performance in Malaysia Banks

The nature of banking business exposed banks to various risks which culminate in the form of liquidity risks. Banks with high liquidity risk may face difficulties in fulfilling its financial obligation to the customers, extending their business and eventually may affect the overall performance of the bank. Understanding the critical effects of liquidity risk, this study aimed at examining the liquidity risk exposure of Malaysian banks and its effects on the banks’ performance. It is hypothesized that high liquidity risk will decrease the bank performance. This study used three liquidity risk indicators and the study period is confined to 2005-2013. The results suggest that the Malaysian banks do not involve in excessive lending, have a reasonable level of liquid assets and good capital standing. However, the regression results revealed that not all of the liquidity risk indicators affect the banks’ performance. Loan to deposit ratio has no significant effects on changes in the bank's performance, liquid asset to total assets imposed opportunity costs to the banks while capital to asset ratio provide mixed results with the performance measures. Overall, the regression results show that the effects of liquidity risk on Malaysian banks’ performance are not clear-cut, and varies with the performance measures used

The Unstable Macroeconomic Factors and Bank Profitability in FCC Area: A Conceptual Framework

The aim of this paper is to discuss at a conceptual level the relationships between the important macroeconomic factors and banks' profitability in the troublous Fertile Crescent Countries (FCC). The instability in the macroeconomic environment is dominating FCC area, especially in the last two decades affecting banking industry. The variables proposed under examination are interest rate, exchange rate, economic growth, inflation rate, and money growth. The model of this study if validated would have significance important policy implications to the governments of FCC and other stakeholders. Thus, the proposed conceptual framework which is drawn upon the existing literature has examined the effect of unstable macroeconomic factors on banks' profitability in FCC countries such as Palestine, Jordan, and Lebanon. The previous studies showed mix and inconclusive results on the effect of macroeconomic factors and banks' profitability. This paper contributes to the existing literature by providing a conceptual arguments that allow for better understanding of the impact of the unstable macroeconomic environment on the profitability of banking industry

The effect of bank-specific factors and unstable macroeconomic environment on bank efficiency: evidence from FCC

The banking industry in the area of Fertile Crescent Countries (FCC) was faced by instability in their political and economic conditions in the last decade, especially during the Arab spring revolutions.The current study investigates empirically the efficiency of banking sector in the troublous areas in developing countries such as FCC. The efficiency estimates of individual banks are evaluated by employing the multiple regression models.This paper examines the effect of a selected bank-specific factors, and unstable macroeconomic conditions on bank efficiency in a selected FCC banks for 10 - year's period 2005-2014. The unbalanced panel data used in this study is derived from Bank Scope data network. The empirical findings are almost consistent with the expected results.Bank deposits and bank size have influence on bank efficiency. Economic conditions found with no effect on efficiency. It was found that liquidity of a bank does not influence bank efficiency, but bank diversification is related with efficiency in FCC

Managing risk of hire purchase financing at SnF Bank

A new CEO was appointed for the SnF Bank and a management reshuffle was carried out with the aim of increasing the loan volume and to improve the quality of loan assets. Following the appointment of the CEO, in 2009, Mr. Ben Gan was appointed as the new Head of Hire Purchase Financing Division of the bank.On the first day in his new position, Mr. Ben had a meeting with the new CEO. He was given the task to improve the quality of the auto financing portfolio. After going through the bank reports, he decided to plan the strategies and the credit underwriting policies to manage the risk in hire purchase financing.This case is designed to assist students to identify risks and analyze the risks in consumer lending environment.The students will also learn how to mitigate risks in lending

Financial Health: Examining the Ability of Malaysian Household in Servicing Their Debts

This study is motivated by the persistent increased in household debts among Malaysian. The increasing trend of household debts raised concerns about the ability of the households to service their debts; especially when bankruptcies rates among Malaysian increase rapidly. Hence, this study seeks to examine the ability of the households in servicing their debts by looking at the association between loan features and types of household loans, and the post-loan debt service ratio. Using estimated logit model, the results show that household loans are associated with different loan features, which also indicates the ability condition of the household to service their debts. The post-loan debt service ratio shows that borrowers of certain types of loans have difficulties or less ability to service their debts. Further, the socio-demographic factors present the association of the borrowers’ characteristics with types of household loans. The results show that the ability to repay debts is different between gender, races, education and employment. The study is conducted on households in three northern states of Malaysi

Household Indebtedness in Malaysia: A Survey Evidence

Increasing trends in using debts as a mechanism to fill the gap between income and expenditures among Malaysian households motivates this study. This study provides a survey evidence on the indebtedness of Malaysian household, particularly in the types of loans which Malaysian households frequently involved in, whether the debts become a financial burden to the households and whether Malaysian households have any alternative source of income as a financial backup for their main income. The survey shows that most Malaysian households having debts in hire purchase loan, debt service ratio of less than 60% and most of them have no alternative source of income. The survey was done on households in three northern states of Malaysia

The risk management committee and bank stability: a proposed framework

The recent spate of bank crisis in Nigeria and the instability that accompanied it in several banks necessitated the need to find out the underlying cause and proffer solutions. This proposed framework is aimed at examining the roles of the risk committee in the crisis. The objective is to investigate the relationship between the risk management committee and bank stability in Nigeria. The framework presents the attributes of the risk management committee that could have impact on bank stability. It also presents the agency and resource dependence theories as relevant to the investigation. Given that this is a proposed framework, it is subject to review. If it is validated, it would contribute towards providing insight into the roles of the risk management committee in Nigerian banks and aid policy formulation on risk governance.

Audit Committee and Banking System Stability: A Conceptual Framework

The functioning of board committees in Nigerian banks has generated interests in recent times. Concerns have been raised on the effectiveness of these committees especially their roles in the promotion of stable banks. One of the committees which attracted both research and regulatory interests is the audit. The efficiency of audit committees in the Nigerian banking system has been questioned. This is a proposed framework aimed at studying the roles of audit committees in the Nigerian banking system especially the impact on bank stability. The framework is focused on the attributes of the committee which include the frequency of meetings, expertise, independence and the size. The study proposed that these attributes could influence the stability of the banking system. The key attributes of the audit committee and how they impact bank stability have been reviewed. It is shown in the review that the audit committee is a vital element in bank stability which demands that more attention should be paid to the behaviour of its characteristics in ensuring bank soundness. The outcome of the research is expected to impact policy formulation on the functioning of the audit committee and equally have implications on bank risk governance structure. It would also be relevant to other researchers undertaking studies relating to board committee functioning in banks, risk governance and bank stability. This study is unique in that previous studies on audit committee did not focus on its roles in banking system stability