The study investigates the extent to which mergers lead to efficiency. The data covers the period 1993-2004, which includes the pre- and post-merger years. This study attempts to evaluate technical efficiency, efficiency change, technical change, and productivity of commercial banks, finance companies, and merchant banks by using a non-parametric Data Envelopment Analysis (DEA) and Malmquist Index approach as the framework for the analyses. It is found that: (i) on an average, productivity across banking institutions increased at an annual rate of 5.8% over the study period; (ii) the results also indicate that almost all of the productivity growth comes from technical change rather than improvement in efficiency change, which contributes to 6.1% of productivity growth, while the latter accounted for 0.2% decline; and (iii) the merger process led to productivity improvements whereby it is observed that the productivity of Malaysia's banking sector has been improved after the implementation of merger program.

Merger is a process whereby two or more companies/institutions join together to strengthen their market positions. Normally, it is market-driven and the main economic considerations for this exercise are: (i) enhancing efficiency and boosting productivity; and (ii) increasing the market share and, in turn, market power by eliminating competitors. However, the Malaysian scenario is quite different and unique, whereby it was based on the request or instruction of the central bank or more precisely Bank Negara Malaysia (BNM).

Hierarchically, Malaysian banking system consists of BNM, which functions as the central bank, banking institutions (commercial banks, merchant banks, and finance companies) and other financial institutions (discount houses, foreign banks representative offices, and offshore bank in the International Offshore Financial Centre in Labuan). At the end of 1997, the licensed banking system consisted of 35 commercial banks, of which 22 are domestic banks and 13 foreign-controlled. This contributes to 43.6% of the total financial system assets, whereby the rest of the financial system assets are made of 39 finance companies (13.6%), 12 merchant banks (4%), 7 discount houses (1.9%), and BNM (9.8%). On the other hand, non-bank financial intermediaries accounted for 27.1% of the total assets of the financial system at the end of 1997 (BNM, 2001).

Bank Negara Malaysia (BNM), Malaysian banking system consists of BNM,banking institutions, commercial banks, merchant banks, finance companies, licensed banking system.