Efficiency in Islamic and Conventional Banking: An International Comparison

Journal of Productivity Analysis, Vol. 34, pp. 25-43

Posted: 1 Sep 2010

See all articles by Mariani Abdul-Majid

Mariani Abdul-Majid

Universiti Kebangsaan Malaysia - School of Economics, Faculty of Economics and Management

David S. Saal

Aston University - Aston Business School

Giuliana Battisti

Warwick Business School

Date Written: 2010

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.

Keywords: Islamic banking, International efficiency comparison, output distance function

JEL Classification: G21, D24, L1

Suggested Citation

Abdul-Majid, Mariani and Saal, David S. and Battisti, Giuliana, Efficiency in Islamic and Conventional Banking: An International Comparison (2010). Journal of Productivity Analysis, Vol. 34, pp. 25-43. Available at SSRN: https://ssrn.com/abstract=1668966

Mariani Abdul-Majid (Contact Author)

Universiti Kebangsaan Malaysia - School of Economics, Faculty of Economics and Management ( email )

UKM Bangi, Selangor 43600
Malaysia
++6 03 8921 5789 (Fax)

David S. Saal

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Giuliana Battisti

Warwick Business School ( email )

Scarman road
Coventry CV4 7AL
United Kingdom

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