The Impact of Islamic Banking on the Cost Efficiency and Productivity Change of Malaysian Commercial Banks

Posted: 1 Sep 2010 Last revised: 23 Jul 2011

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: 2011

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.

Suggested Citation

Abdul-Majid, Mariani and Saal, David S. and Battisti, Giuliana, The Impact of Islamic Banking on the Cost Efficiency and Productivity Change of Malaysian Commercial Banks (2011). Applied Economics, Vol. 43, No. 16, pp. 2033-2054. Available at SSRN: https://ssrn.com/abstract=1669073

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

Register to save articles to
your library

Register

Paper statistics

Abstract Views
649
PlumX Metrics