Comparative Efficiency Study between Islamic and Traditional Banks

25 Pages Posted: 27 Jun 2016 Last revised: 30 Jun 2016

See all articles by Mohamed H. Rashwan

Mohamed H. Rashwan

Loughborough University - The British University in Egypt

Heba Ehab

The British University in Egypt

Date Written: June 27, 2016

Abstract

Islamic banking caught attention due to its resilience to the significant shocks that hit the economy in late 2008. This research aims to evaluate the efficiency of a sample of 66 banks including both Islamic and traditional banks in various countries ranging from Egypt, Pakistan, Bangladesh, Saudi Arabia, Kuwait, Qatar, Iraq, Emirates, Sudan, Turkey, Bahrain and Jordan throughout 2009-2014. This research aims at identifying which banking regime proves to be more efficient and its significance using Financial Ratio Analysis (FRA), composed of cost efficiency, revenue efficiency and profit efficiency ratios along with the One-way ANOVA test. The impact of efficiency of the performance of the banks in terms of Return on Assets (ROA) and Return on Equity (ROE) is also evaluated through multiple regression analysis. Lastly, inflation’s effect on the different banking efficiency measures will be tested using regression analysis. The findings indicate that the traditional banking system is superior in terms of cost, revenue and profit efficiencies, furthermore, the results of the multiple regression analysis on the banks’ return on assets and return on equity imply that the efficiency of Islamic banks have more influence on their profitability compared to their traditional counterparts. Inflation had minimal effect on the efficiency of both banking system. The overall results imply the superiority of traditional banks to the relatively new banking system.

Keywords: Islamic Banking, Traditional Banking, Efficiency, Financial Ratio Analysis (FRA), Multiple Regression Analysis, ANOVA

JEL Classification: B19, C12, G21

Suggested Citation

Rashwan, Mohamed H. and Ehab, Heba, Comparative Efficiency Study between Islamic and Traditional Banks (June 27, 2016). Available at SSRN: https://ssrn.com/abstract=2801187 or http://dx.doi.org/10.2139/ssrn.2801187

Mohamed H. Rashwan (Contact Author)

Loughborough University - The British University in Egypt ( email )

ElSherouk City
Cairo, 11837
Egypt

HOME PAGE: http://www.bue.edu.eg/index.php/business-adminstaff/mohamed-h-rashwan

Heba Ehab

The British University in Egypt ( email )

El Sherouk City
Cairo, 11837
Egypt

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