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Efficiency of Islamic and conventional banks in Malaysia

Author

Listed:
  • Farhana Ismail
  • M. Shabri Abd. Majid
  • Rossazana Ab. Rahim

Abstract

Purpose - The main purpose of this paper is to examine cost efficiencies of the selected Islamic and conventional commercial banks over the period of 2006 to 2009 in Malaysia. Design/methodology/approach - Data envelopment analysis (DEA) was initially used, to investigate the cost efficiency of the Malaysian banking sector and followed by Tobit regression analysis determine factors influencing the efficiency of Islamic and conventional banks in Malaysia. Findings - The DEA results reveal technical efficiency as the main contributor of cost efficiency for conventional commercial banks and allocative efficiency as the main contributor for cost efficiency of Islamic commercial banks. This indicates conventional commercial banks have been efficient in utilizing information technology and electronics. Islamic commercial banks conversely have been efficient in allocating and utilizing their resources. Additionally, scale efficiency is found to be the main source of technical efficiency for both Islamic and conventional commercial banks, denoting that size is important in improving bank efficiency. The results of Tobit regression analysis are twofold. First, it documents capitalization and bank sizes are positively and significantly associated to efficiency. Secondly, loan quality is found to be negatively and significantly associated to efficiency. Originality/value - This paper contributes to the body of knowledge through its literature discussions on the efficiency of both Islamic and conventional banks and the effect of banks' specific characteristics on their efficiency.

Suggested Citation

  • Farhana Ismail & M. Shabri Abd. Majid & Rossazana Ab. Rahim, 2013. "Efficiency of Islamic and conventional banks in Malaysia," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 11(1), pages 92-107, June.
    • Handle: RePEc:eme:jfrapp:v:11:y:2013:i:1:p:92-107
    DOI: 10.1108/JFRA-03-2013-0011
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    Citations

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    Cited by:

    1. Ebenezer Fiifi Emire Atta Mills & Mavis Agyapomah Baafi & Fangbiao Liu & Kailin Zeng, 2021. "Dynamic operating efficiency and its determining factors of listed real‐estate companies in China: A hierarchical slack‐based DEA‐OLS approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3352-3376, July.
    2. Hassan, M. Kabir & Aliyu, Sirajo, 2018. "A contemporary survey of islamic banking literature," Journal of Financial Stability, Elsevier, vol. 34(C), pages 12-43.
    3. Nupur Moni Das & Bhabani Sankar Rout, 2020. "Banks’ capital adequacy ratio: a panacea or placebo," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(3), pages 303-318, September.
    4. Ayobami Ojeyinka, Titus & Enisan Akinlo, Anthony, 2021. "Does Bank Size Affect Efficiency? Evidence From Commercial Banks In Nigeria," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 8(1), pages 79-100, June.
    5. Abdul Latif Alhassan & Michael Lawer Tetteh, 2017. "Non-Interest Income and Bank Efficiency in Ghana: A Two-Stage DEA Bootstrapping Approach," Journal of African Business, Taylor & Francis Journals, vol. 18(1), pages 124-142, January.
    6. Achraf Haddad & Anis El Ammari & Abdelfettah Bouri, 2019. "Comparative Study of Ambiguity Resolution between the Efficiency of Conventional and Islamic Banks in a Stable Financial Context," International Journal of Economics and Financial Issues, Econjournals, vol. 9(5), pages 111-129.

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