How Large Are Productivity Differences between Islamic and Conventional Banks?

40 Pages Posted: 24 Nov 2015

See all articles by Wahida Ahmad

Wahida Ahmad

Universiti Teknologi MARA (UiTM)

David Prentice

Infrastructure Victoria

Date Written: August 6, 2015

Abstract

Despite the enormous growth in Islamic banking over the last thirty years, most studies, using DEA/stochastic frontier analysis, have found Islamic banks are either as productive or less productive than conventional banks. We take advantage of recent improvements in the direct estimation of production functions by Olley-Pakes and Ackerberg-Caves-Frazer (ACF) to develop fresh evidence on this question. Production functions are estimated and productivity calculated for conventional and Islamic banks in Bahrain and Malaysia between 1990 and 2011. We find that although in many respects the different techniques yield similar results, the ACF results are more plausible. Islamic banks in both countries tend to be around 50% as efficient as conventional banks though productivity growth is faster for Islamic banks. However, in Malaysia, a new set of banks, which we refer to as mixed banks, offering both conventional and Islamic banking, outperform conventional and Islamic banks in levels and growth. In Malaysia, at least, this new institution seems a promising way to meet the increasing demand for Islamic banking services.

Keywords: Banking, Islamic Banking, Productivity, Production Function

JEL Classification: G21,L11,D24

Suggested Citation

Ahmad, Wahida and Prentice, David, How Large Are Productivity Differences between Islamic and Conventional Banks? (August 6, 2015). Available at SSRN: https://ssrn.com/abstract=2677101 or http://dx.doi.org/10.2139/ssrn.2677101

Wahida Ahmad

Universiti Teknologi MARA (UiTM) ( email )

40450 Shah Alam
Johor
Dungun, Selangor 23000
Malaysia

David Prentice (Contact Author)

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

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