Performance and productivity in Islamic and conventional banks: Evidence from the global financial crisis

Abstract

We assess the performance and productivity of Islamic and conventional banks using financial ratios, a two-and a four-component meta-frontier Malmquist productivity index (MPI). We focus on the relatively homogenous GCC region over the 2006-2012 period that covers the global financial crisis. We find that Islamic banks exhibit worse cost and profit performance but are on a par with regards to revenue performance compared to the conventional ones. The components of the meta-frontier MPI suggest that the technology of conventional banks improves markedly in years leading to the financial crisis and declines thereafter. Islamic banks show a similar but more muted pattern. By contrast, the pronounced within-Islamic bank group variation in technical efficiency and technology suggest that Islamic banks are quite heterogeneous as a group. Overall, the MPI analysis suggests that the two bank types are more aligned following the global financial crisis. Policy implications are subsequently discussed.

Corporate governance and banks’ productivity: evidence from the banking industry in Bangladesh

“…As per the study of Epure et al (2011), productivity is decomposed into technological and efficiency change using the Malmquist Productivity Index (MPI). Alexakis et al (2019) also adopted MPI to conduct a comparative investigation of productivity and operational outcomes of conventional banks and Shari'ah based banks. To investigate the impact of corporate governance on the banks' efficiency, Romano et al (2012a, b) also used the similar method.…”

Assessment of Financial Performance and Efficiency of Islamic and Traditional Banks in the Post-Crisis Period

“…Both control measures have implications for the overall profitability of Islamic banks as administrative and business development expenses affect the relative efficiency and performance of the investment solution. Exemplifying this effect, Alexakis et al (2019) performed a time-series comparison of performance between Islamic and conventional banks between 2006 and 2012, confirming a lower cost performance that can be linked to higher administrative expenses related to the SSB and the Shariah-compliant products.…”

“…In spite of evidence (e.g. Choudhury and Hoque, 2006;Alexakis et al, 2019) suggesting that Islamic banks are outperforming their conventional counterparts, Abdul-Majid et al (2017) offer contrarian findings, suggesting that Islamic banks are subject to a high level of variability in their performance structures, with group efficiencies during the study's sample period falling significantly below that of conventional institutions. One of the implications of such contrasting evidence is that when assessing Islamic banking outside of a narrow geographic niche, the evidence presented by Abdul-Majid et al (2017) avoids the regional smoothing effects of narrow industry similarities (e.g.…”

“…In order to ensure the smoothed-out return payment, Islamic banks maintain a profit equalisation reserve (PER) and an investment risk reserve (IRR) which allow them to remain competitive and resolve commercial pressures and risk by limiting some of the institutional profit share when needed (Alzahrani and Megginson, 2017). Following the financial crisis, Alexakis et al (2019) have proposed that Islamic banks took longer to align with the profitability rates of conventional banks, an outcome which they suggest may be related to the smoothing practices and earnings management techniques employed by conventional banks during this recovery period.…”

“…Productivity indicators vary throughout the prior research in this study, with emphasis placed on returns and profitability as researchers strive to illuminate the relationship between inputs and outputs. Malmquist productivity is derived from a distance function wherein multiple outputs are compared with multiple inputs in order to derive a bank's technical efficiency and assess productivity change over a set time frame (Alexakis et al, 2019). In comparing the descriptive statistics for a data envelopment analysis (DEA) and stochastic frontier analysis (SFA), Alexakis et al (2019) identified the following core descriptive statistics including the total loans, other earning assets, deposits & short term funding, fixed assets, general and admin expenses, and equity, for conventional and Islamic banks over the sample time frame (2006)(2007)(2008)(2009)(2010)(2011)(2012).…”