Efficiency in Islamic and Conventional Banks: Evidence from the Gulf Cooperation Council Countries
36 Pages Posted: 21 Mar 2014
Date Written: January 20, 2014
We examine efficiency in Islamic and conventional banking systems in the Gulf Cooperation Council (GCC) region (2004-2007) using financial ratio analysis (FRA) and data envelopment analysis (DEA). We find the two approaches are complementary in terms of the information they provide. From the FRA, the Islamic banking system is less cost efficient but more revenue and profit efficient than the conventional one. Bootstrapped tests confirm that these differences are significant. From the DEA, average efficiency is significantly lower in Islamic than conventional banks. A decomposition of the DEA efficiencies demonstrates that the efficiency difference is more a consequence operating under Islamic rules (i.e. the banking system itself) rather than of managerial inadequacies. Productivity growth has been slight, and can be attributed to the sluggish adaptation of inefficient banks to technological advancements.
Keywords: Banking sector; Efficiency; Data Envelopment Analysis; Financial ratio analysis; Gulf region
JEL Classification: C14, G21
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