A Meta-Frontier Function for the Estimation of Islamic and Conventional Banks’ Cost and Revenue Efficiency: The Case of Malaysia from 2006 to 2012

Abstract

We measure cost and revenue efficiency of the Islamic and conventional Malaysian banks by using the stochastic frontier method and the meta-frontier analysis (MFA) over the period [2006][2007][2008][2009][2010][2011][2012]. The use of MFA allows for the correction of the efficiency measurement errors caused by the technological and operational gap. The specific as well as the common frontiers obtained by the stochastic frontier method show the superiority of Islamic banks (IBs) compared to conventional banks (CBs) in terms of cost and revenue efficiency. This can reflect their high managerial capability. Efficiency measurement using MFA partially revealed different results. CBs have higher annual averages of cost efficiency scores than those of IBs over the period 2006-2011. The observed evolutionary trends of these averages contradict those of the capital base. This change in results is explained according to Johnes et al. (2013) by the modus operandi of IBs which seems in average less efficient than that of CBs. As for revenue efficiency, IBs are more efficient than CBs over the entire study period even though the evolution of the technological gap ratio confirms the inefficiency of their modus operandi. These results may be useful to political decision-makers and regulatory authorities.

Evaluating Efficiency Change in Taiwan’s Financial Industry

“…The frontier results reveal that local Islamic banks have moved toward the group technology and foreign Islamic banks have taken the lead in country frontier technology. Ghroubi and Abaoub (2016) used stochastic frontier analysis (SFA) and meta-frontier analysis (MFA) to measure cost and revenue efficiencies of Islamic and conventional Malaysian banks over the period 2006-2012. They divided the sample into two groups, Islamic banks (IBs) and conventional banks (CBs), and showed that as for revenue efficiency, IBs are more efficient than CBs over the entire period, even though the evolution of the technological gap ratio confirms the inefficiency of their modus operandi.…”

“…Zhang et al (2006) Dynamic DEA Evaluating efficiency in the US securities industry This industry in general is less efficient than the existing technology allows, and the relative productivity of the U.S. securities industry in general declined. Hu et al (2012) Fourth stage DEA Manager Attributes and Fund Performance: Evidence from Taiwan Female fund managers perform more outstandingly than male fund managers both in cost control and risk management Huang et al (2010) Meta-frontier and stochastic frontier approach Meta-frontier cost function to the study of bank efficiencies and technology gaps in 16 European countries The average efficiency of financial sectors improves over time and that the technology gap between a country's cost frontier and the potential meta-frontier shrinks over time Ghroubi and Abaoub (2016) Meta-Frontier Function Estimating Islamic and conventional banks' cost and revenue efficiency Islamic banks are more efficient than conventional banks over the entire period, even though the evolution of the technological gap ratio confirms the inefficiency of their modus operandi. the network of division linkages.…”

Integration of network data envelopment analysis and decision‐making trial and evaluation laboratory for the performance evaluation of the financial holding companies in Taiwan

“…In addition, Huang, Chen, and Yin () used fixed assets, equity, and personnel expenses as inputs; deposits and short‐term funding and other raised funds as intermediates; and gross loan, other earning assets, and NPLs as outputs in evaluating banks in China. Ghroubi and Abaoub () measured cost and revenue efficiency of the Islamic and conventional Malaysian banks by using the stochastic frontier method and the meta‐frontier analysis over the period 2006–2012. The specific and the common frontiers obtained by the stochastic frontier method show the superiority of Islamic banks compared with conventional banks in terms of cost and revenue efficiency.…”

A Study of the Determinants of Cost and Revenue Efficiency in the Context of Islamic and Conventional Banks: The Case of Malaysia from 2006 to 2012

“…A more detailed analysis of the calculation of efficiency scores in the Malaysian context using the meta-frontier approach is presented in Ghroubi and Abaoub (2016).…”