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A comparative study on the level of efficiency between Islamic and conventional banking systems in Malaysia

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Author Info

  • Mohamed Hisham Yahya
  • Junaina Muhammad
  • Abdul Razak Abdul Hadi
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    Abstract

    Purpose – The purpose of this paper is to study the difference (or lack of difference) in the efficiency level of Islamic and conventional banking in Malaysia. Are the Islamic banks performing as good as the conventional banks, even though they are constrained by Islamic tenets? Design/methodology/approach – Data envelopment analysis is used to measure the efficiency levels of banks in both sectors. Findings – It is found that there is no significant difference in the level of efficiency between Islamic banks and conventional banks. Research limitations/implications – The period of study is only three years, with only two banks which have been operating for more than three years, while the other Islamic banks in this study are just beginning their operation in Islamic banking. The inclusion of foreign banks operating in Malaysia in this analysis might distort the findings, as foreign banks have different capital structures and objectives compared to local ones. Practical implications – The paper shows that even though Islamic banks are limited by Islamic tenets in their operations, they are able to maintain a performance that is equivalent to the conventional banks. Originality/value – The paper makes comparisons of the efficiency levels between two different banking systems.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1753-8394&volume=5&issue=1&articleid=17024833&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Islamic and Middle Eastern Finance and Management.

    Volume (Year): 5 (2012)
    Issue (Month): 1 (April)
    Pages: 48-62

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    Handle: RePEc:eme:imefpp:v:5:y:2012:i:1:p:48-62

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Banks; Conventional banks; Data envelopment analysis; Efficiency; International banks; Islam; Islamic banking; Malaysia; Nonparametric;

    References

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    1. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    2. Rhoades, Stephen A., 1998. "The efficiency effects of bank mergers: An overview of case studies of nine mergers," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 273-291, March.
    3. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    4. Laurens Cherchye, 2001. "Using data envelopment analysis to assess macroeconomic policy performance," Applied Economics, Taylor & Francis Journals, vol. 33(3), pages 407-416.
    5. Masudul Alam Choudhury & Md. Mostaque Hussain, 2005. "A paradigm of Islamic money and banking," International Journal of Social Economics, Emerald Group Publishing, vol. 32(3), pages 203-217, March.
    6. Rolf Färe & Shawna Grosskopf & Dimitri Margaritis, 2001. "Productivity Trends in Australian and New Zealand Manufacturing," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 34(2), pages 125-134.
    7. Schmidt, Peter & Knox Lovell, C. A., 1979. "Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers," Journal of Econometrics, Elsevier, vol. 9(3), pages 343-366, February.
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