Efficiency in Islamic and conventional banking

An international comparison

Mariani Abd Majid, David S. Saal, Giuliana Battisti

Research output: Contribution to journalArticle

60 Citations (Scopus)

Abstract

The paper investigates the efficiency of a sample of Islamic and conventional banks in 10 countries that operate Islamic banking for the period 1996-2002, using an output distance function approach. We obtain measures of efficiency after allowing for environmental influences such as country macroeconomic conditions, accessibility of banking services and bank type. While these factors are assumed to directly influence the shape of the technology, we assume that country dummies and bank size directly influence technical inefficiency. The parameter estimates highlight that during the sample period, Islamic banking appears to be associated with higher input usage. Furthermore, by allowing for bank size and international differences in the underlying inefficiency distributions, we are also able to demonstrate statistically significant differences in inefficiency related to these factors even after controlling for specific environmental characteristics and Islamic banking. Thus, for example, our results suggest that Sudan and Yemen have relatively higher inefficiency while Bahrain and Bangladesh have lower estimated inefficiency. Except for Sudan, where banks exhibits relatively strong returns to scale, most sample banks exhibit very slight returns to scale, although Islamic banks are found to have moderately higher returns to scale than conventional banks. While this suggests that Islamic banks may benefit from increased scale, we would emphasize that our results suggest that identifying and overcoming the factors that cause Islamic banks to have relatively low potential outputs for given input usage levels will be the key challenge for Islamic banking in the coming decades.

Original languageEnglish
Pages (from-to)25-43
Number of pages19
JournalJournal of Productivity Analysis
Volume34
Issue number1
DOIs
Publication statusPublished - 2010

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international comparison
banking
bank
efficiency
Sudan
International comparison
Banking
Bahrain
Yemen
Islamic banking
Inefficiency
Bangladesh
macroeconomics
Islamic financial institutions
Factors
Returns to scale
cause
Bank size

Keywords

  • International efficiency comparison
  • Islamic banking
  • Output distance function

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Social Sciences (miscellaneous)

Cite this

Efficiency in Islamic and conventional banking : An international comparison. / Abd Majid, Mariani; Saal, David S.; Battisti, Giuliana.

In: Journal of Productivity Analysis, Vol. 34, No. 1, 2010, p. 25-43.

Research output: Contribution to journalArticle

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