Abstract
This study employs Stochastic Frontier Analysis (SFA) to analyse Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalized Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68%, with the latter driven primarily by Technical Change (TC), which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid TC, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term costreducing effect in 1998, the crisis triggered a long-lasting negative impact by increasing the volume of nonperforming loans.
| Original language | English |
|---|---|
| Pages (from-to) | 2033-2054 |
| Number of pages | 22 |
| Journal | Applied Economics |
| Volume | 43 |
| Issue number | 16 |
| DOIs | |
| Publication status | Published - Jun 2011 |
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ASJC Scopus subject areas
- Economics and Econometrics
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The impact of islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. / Abd Majid, Mariani; Saal, David S.; Battisti, Giuliana.
In: Applied Economics, Vol. 43, No. 16, 06.2011, p. 2033-2054.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The impact of islamic banking on the cost efficiency and productivity change of Malaysian commercial banks
AU - Abd Majid, Mariani
AU - Saal, David S.
AU - Battisti, Giuliana
PY - 2011/6
Y1 - 2011/6
N2 - This study employs Stochastic Frontier Analysis (SFA) to analyse Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalized Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68%, with the latter driven primarily by Technical Change (TC), which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid TC, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term costreducing effect in 1998, the crisis triggered a long-lasting negative impact by increasing the volume of nonperforming loans.
AB - This study employs Stochastic Frontier Analysis (SFA) to analyse Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalized Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68%, with the latter driven primarily by Technical Change (TC), which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid TC, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term costreducing effect in 1998, the crisis triggered a long-lasting negative impact by increasing the volume of nonperforming loans.
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U2 - 10.1080/00036840902984381
DO - 10.1080/00036840902984381
M3 - Article
VL - 43
SP - 2033
EP - 2054
JO - Applied Economics
JF - Applied Economics
SN - 0003-6846
IS - 16
ER -