We use a new dataset on Islamic banks to link regulation and bank efficiency. Specifically, we examine how bank efficiency is influenced by: (i) bank regulation, (ii) institutional variables, (iii) economic freedom, and (iv) Shariah law parameters. Our hypothesis attempts to prove that better regulation will produce a higher level ofefficiency. We will also try to prove that the Shariah law parameter will promote better efficiency among Islamic banks. Data Envelopment Analysis (DEA) is used to measure efficiency, while the panel data method is used to analyse the data. Specifically, our results suggest that a significant relationship exists between bank efficiency and greater restrictions on Islamic bank activities. The results also show that regulatory quality hasa positive and significant impact on bank efficiency. The negative coefficient of the economic freedom indicates that Islamic banks have a greater ability to enter into the banking industry and obtain an easy licence, create products and services, and close the business. All would dampen bank efficiency. Overall, our findings support the argument that regulation should be adapted to the risk and size level of the Islamic banks that are being regulated.

Purpose – The aim of this paper is to discuss the similarities and differences of both conventional and Islamic financial institutions from various institutional perspectives. Design/methodology/approach – This conceptual paper describes the insights held by the financial institution theory which is discussed from the perspectives of the economics of the financial institution, legal environment, the political aspect of an institution, the philosophical underpinning, the components of institution and also the ethical role of institution. Then, this paper will proceed to justify the similarities and differences that have been observed between both institutions. Findings – Discussions in this paper will reveal that specifically specific similarity is prevalent on the nature of the supervisory role. The differences between both institutions from the aspects of business organization, economic roles and law of origin have also been found. Research limitations/implications – The similarities and differences that are established on both institutions will affect the structure of the financial contract and the design of financial systems. Originality/value – The paper will contribute a new knowledge specifically on the design of the Islamic financial contract based on Shariah law at the initial phase.