A comparison of performance of Islamic and conventional banks 2004–2009

Abstract

We compare, using data envelopment analysis (DEA) and meta-frontier analysis (MFA), the performance of Islamic and conventional banks during the period [2004][2005][2006][2007][2008][2009]. The use of nonparametric MFA is new to the Islamic banking context. Our DEA finds no significant difference in mean efficiency between conventional and Islamic banks when efficiency is measured relative to a common frontier. The MFA however, reveals some fundamental differences between the two bank types. In particular, the modus operandi in Islamic banking appears to be less efficient on average than the conventional one. Managers of Islamic banks, however, make up for this as mean efficiency in Islamic banks is higher than in conventional banks when efficiency is measured relative to their own bank type frontier. A second-stage analysis shows that differences between the two banking systems remain even after banking environment and bank-level characteristics have been taken into account. These findings are relevant to both policy-makers and regulators. In particular, Islamic banks should explore the benefits of moving to a more standardized system of banking, while the underperformance of conventional bank managers could be examined in the context of the on-going remuneration culture.

Banks and economic growth in developing countries: What about Islamic banks?

“…This result can be explained by the difference in the profitability and efficiency between IBs and CBs, especially in our study period, which integrates the period of the last Subprime crisis. The results are consistent with the findings of Goaied and Sassi (2010) and Johnes et al (2014).…”

“…Several studies attempted to assess the efficiency measured by the ROA and the ROE of IB (Darrat, Topuz, & Yousef, 2002;Goaied & Sassi, 2010;Hassan, 2005;Johnes, Izzeldin, & Pappas, 2014;Muharrami, 2008;Sufian & Akbar Noor Mohamad Noor, 2009). Darrat et al (2002), Hassan (2005), Muharrami (2008) and Sufian and Akbar Noor Mohamad Noor (2009) claimed that IBs are significantly more efficient than conventional ones.…”

“…All those IB advantages allow them to promote economic growth. However, using data envelopment analysis (DEA) and meta-frontier analysis (MFA), Johnes et al (2014) Similarly, for Abduh and Chowdhury (2012), the variables to be employed in this work to measure the development of IBs are the total deposit (T-Dep), total investments (T-INVM), total incomes (T-INCOM), number of branches (NBR_BRAN), and number of employees (NBR_EMPL) as indicators of the bank development. The authors confirmed that the Islamic banking development has a positive and significant relationship with economic growth.…”

Comparative Performance Analysis between Conventional and Islamic Banks in Bangladesh- An Application of Binary Logistic Regression

“…This is due to the fact that Islamic banks are highly regulated by Shariah (Note 3) principles which restrict them to invest in the projects which brought conventional banks in distress and stimulated crisis (Hasan & Dridi, 2011). As a result, Islamic finance brings the attention of the investors who were disappointed with conventional banks experiencing GFC in recent years (Johnes et al, 2014). Thus, Islamic banking is not confined only in Muslim countries rather extends its practices to non-muslim countries as well.…”

“…Most of the research of Islamic finance are theoretical in nature focusing on Islamic fundamentals and the vehicles of Islamic banking (Bashir, 1983;Karim, 2001;Siddiqi, 2006;Chong & Liu, 2009;Khan, 2010;Faye et al, 2013;Said et al, 2013;Magd & McCoy, 2014). Empirical studies on Islamic banking can be grouped on regulatory, management and supervisory challenge (Murjan & Ruza, 2002;Jobst, 2007); efficiency (Abdul-Majid et al, 2010;Belanes & Hassiki, 2012;Rosman et al, 2014); Profitability (Hassoune, 2002;Ben Khediri & Ben-Khedhiri, 2009;Farook et al, 2012); Stability and concentration (Bourkhis & Nabi, 2013;Mohammed et al, 2015); Risk exposure (Abdul Karim et al, 2014;Farook et al, 2014;Ghosh, 2014;Saiti et al, 2014;Shaban et al, 2014;Daher et al, 2015); and Comparative performance of Islamic banks with conventional banks (Beck et al, 2013;Bourkhis & Nabi, 2013;Srairi, 2013;Ho et al, 2014;Johnes et al, 2014;Khediri et al, 2015). However, increased attention of Islamic banking across the world require to know the comparative strength and bank level performance between Islamic banks and conventional banks.…”