The impact of islamic banking on the cost efficiency and productivity change of Malaysian commercial banks

Mariani Abd Majid, David S. Saal, Giuliana Battisti

Research output: Contribution to journalArticle

26 Citations (Scopus)

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 languageEnglish
Pages (from-to)2033-2054
Number of pages22
JournalApplied Economics
Volume43
Issue number16
DOIs
Publication statusPublished - Jun 2011

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Islamic banking
Commercial banks
Productivity change
Efficiency change
Costs
Technical change
Islamic financial institutions
Asian financial crisis
Scale economies
Bank mergers
Stochastic frontier analysis
Technical and scale efficiency
Bank performance
Disadvantage
Productivity
Non-performing loans
Malmquist productivity index

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

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 journalArticle

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